2 February 2017 Asia Pacific/ Equity Research

Korea Market Strategy The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver CONNECTIONS SERIES incisive cross-sector and cross-border thematic insights for our clients.

Research Analysts Unwinding Korea’s discount

Gil Kim 82 2 3707 3763 Figure 1: Summary of proposed bills on corporate governance [email protected] Category Summary of proposed bills Minseok Sinn Cross-ownership 82 2 3707 8898 Unwind all existing cross shareholding. [email protected] Holding company Strengthen holdco classification, limit the leverage (debt-to-equity) of holding company, increase minimum required ownership of subsidiaries, prohibiting Michael Sohn ownership of unrelated grand-subsidiaries. 82 2 3707 3739 [email protected] Treasury shares Restriction on use of treasury shares on spin-off, prohibit resale of treasury shares to select company or person. A-Hyung Cho Intra-group transactions 82 2 3707 3735 Strengthen regulation on intra-group revenue transactions. [email protected] Outside BoD Improve independence of BoD, grant minority shareholders the right to appoint BoD members, require cumulative voting. Jennifer Yu 82 2 3707 3738 Derivative lawsuit Shareholders can file a lawsuit against directors of subsidiaries. [email protected] Electronic voting Require electronic voting for all large-size companies. Hoonsik Min National Pension Reform National Pension for more independence and expertise. 82 2 3707 3761 Source: Maeil Economy, Chosunbiz, Ministry of Government Legislation, Credit Suisse research [email protected] Sohyun Lee ■ Political issues, of late, have heightened, and public sentiment is shifting 822 3707 3737 [email protected] towards “economic democratisation". A slew of bills related to corporate governance have been proposed. We delve into all those pending regulations

to analyse the impact on, and establish investment opportunities within, the , Hyundai Motor and Lotte group companies, in expansion to our previous researches on Samsung Group restructuring. ■ The pending bills, if approved, would complicate the ownership restructuring process of large-sized corporates in Korea, in our view. Our base case investment thesis assumes an expedited reshuffling of ownership structure. Based on scenario analyses conducted by CS's research team, transitioning to a holding company is the most feasible ownership restructuring for all three groups. This, in turn, would unlock value for select counters, in our view. We believe and Hyundai Motor are key beneficiaries. We upgrade Lotte Shopping to NEUTRAL from Underperform. ■ Under a scenario where the proposed bills are fully enacted, a meaningful improvement in Korea's corporate governance is anticipated, leading to more efficient capital management. Credit Suisse HOLT sees upside of 30% for KOSPI if excess cash and/or capital is redistributed to shareholders. We also believe that a more efficient capital management will unwind Korea's current valuation discount of ~20% against Asia ex-Japan on 12-month forward P/E.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 February 2017

Focus tables

Figure 2: Samsung Electronics—estimation of the upside from holdco transition 92 1) Samsung Opco - Value (2017E, Post 2) Samsung Holdco - Value (2017E, Book Value Marked to Wbn) Current Demerger Wbn) Pre-split Market Value Revenue 235,983 235,983 a) LT Investment to Split-off: 5,837 8,541 Operating Profits 42,776 42,776 b) BV of Treasury Shares 10,955 35,476 Interest Income Adjustment 660 c) Cash 30,000 30,000 Equity-method gain Adjustment 400 Holdco Book Value - Marked to Market 46,792 74,018 Pretax Profits 44,346 43,286 Number of Common Shares (mn) 137 Net Income 31,929 31,166 BV per Share (W) 540,274 Total Equity 210,127 163,336 Holdco Shr Val Discount Rate @ 30% (W) 378,192 ROE 15.2% 19.1% Number of common shares(mn) 137 3) Samsung - Split-up Value (2017E, W) 2,653,077 EPS(W) 227,488 Target Multiple 10x 2017 PER(W) 2,274,885

Source: Company data, WISEfn, Credit Suisse estimates

Figure 3: HMG—potential upside after the Figure 4: SoTP assuming Lotte Shopping forms restructuring holdco (W bn, %) HMC Mobis Base case Blue sky Current market cap for HMC/Kia/Mobis 31,389 15,302 25,893 Consolidated affiliates 3,639 3,639 Target market cap for Holdco 24,351 9,290 11,137 Opco NAV 1,427 2,959 Target market cap for Opco 38,080 14,145 25,616 Related affiliates 1,346 1,346 Target market cap for HMC/Kia/Mobis 62,431 23,435 36,752 Inv holdings avail for sale 275 275 Upside (%) 99% 53% 42% Brand Royalty 728 728

Treasury 135 135 Net debt 1,751 1,751 Holdco NAV 5,799 7,331 Holdco NAV at 30% discount 4,059 5,132

Opco 7,175 10,492 Net debt 4,087 4,087 Opco NAV 3,088 6,406

Lotte Shopping Holdco+Opco 7,147 11,537 % from current price -2% 59% Base case Blue Sky Opco NAV 1,427 2,959

Source: Company data, Bloomberg, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: Past CS Korea Research reports on Samsung Group restructuring Date Company Title Link 6/18/2014 Korea Strategy How to untangle Samsung group's ownership? (link) 11/25/2014 SDS A crucial stepstone (link) (link) 1/8/2015 Anticipation priced in (link) (link) 1/12/2015 SEC Scenarios for company split-up (link) (link) 11/29/2016 Samsung Life Implications of SEC's potential holdco transition (link) (link) 11/29/2016 SEC Key takeaways from the updated shareholder return announcement (link) (link) 12/6/2016 SDS Valuation back to supportive level eventually. Upgrade to Neutral (link) (link)

Source: Credit Suisse research

Korea Market Strategy 2 2 February 2017

Unwinding Korea’s discount Potential upgrade of Korea's corporate governance could lead to a rerating Political issues, of late, have heightened, and public sentiment is shifting towards “economic democratisation”. A slew of bills related to corporate governance has been proposed. These pending regulations would, in our view, (1) limit controlling shareholders' access to corporate capital at the expense of minority shareholders, (2) reinforce the fiduciary duty and the expertise of National Pension Service Investment Management, and (3) reform the Board of Directors (BoDs) to enhance independence. The fact that more tightened regulations are pending will likely expedite the large conglomerate ownership restructuring process, in our view. In case the proposed bills are approved, it would improve corporate governance reform and capital management, leading to rerating opportunities, in our view. According to HOLT, KOSPI (ex-Financial) offers 30% upside if excess cash is redistributed to the shareholders. Samsung: Reshuffle already irreversible Regardless of the final outcome of the ongoing political churn in Korea, we expect Samsung Group to continue its reshuffling work as it tries to cut flab—this would not only help enhance the controlling family’s governance power in the group but also significantly reduce the gap between the interest of the controlling family and that of the minorities. Indeed, we think Samsung Group may accelerate the pace of the remaining reshuffle. After all, we believe the group will eventually evolve into a dual-layer holding company structure after the split-up of Samsung Electronics (SEC) into a holding company and an operating company, which appears the optimal way to meet the key requirements for the reshuffling work with minimised reputational risk. While the split-up plan requires approval from SEC’s shareholders, we see no major barriers to the approval given the split-up implies an unlocking of underappreciated value in SEC’s investment asset and helps increase the value of the minorities. (Samsung C&T report) Hyundai Motor: Regulations and peer pressure to lead restructuring. We provide three different scenario analyses for Hyundai Motor Group (HMG) and believe splitting three companies (HMC, Kia, and Mobis) into holdco and opco followed by the three holdcos' merger (scenario 1) would be the most suitable scenario for the group. As the group restructuring requires the Chung family's Glovis share swap to get the new holdco shares, Glovis will eventually lose the owner's (Chung family) premium which is a negative for the stock. ( report) Lotte: Value accretion from Holdco formation already in the price Lotte Group Chairman's announcement to improve group transparency, and the potential regulation change on holdcos could be strong incentives for Lotte Group to accelerate the procedure to form a holdco. Lotte Group is different from other major Korean conglomerates in that the key affiliate companies are heavily owned by the owner family/ affiliates but complicatedly cross-held. This implies the group will have multiple options to maximise the major shareholders' ownership without much affecting minority shareholders' interests. We expect the initial step would be to merge Lotte Shopping and Lotte Confectionery, and the combined entity to form a holdco. This process of asset reshuffling should unlock value, given its current complex holding structure; hence our upgrade to NEUTRAL from the previous Underperform rating.

Korea Market Strategy 3 2 February 2017

Sector valuation table

Figure 6: Valuation table Samsung Group MSCI Price (KRW) Upside EPS (KRW) EPS Growth (%) P/E (x) ROE (%) P/B (x) Company Ticker Sector Rating Local Target to TP (%) 16E 17E 16E 17E 16E 17E 17E 17E Samsung Electronics 005930.KS IT O 1,973,000 2,650,000 34.3 161,589 233,622 23.0 44.6 12.2 8.4 14.4 1.1 Samsung C&T 028260.KS Industrials N 126,000 135,000 7.1 647 2,690 -96.1 315.9 194.8 46.8 2.7 1.2 Samsung Life 032830.KS Financials O 111,000 124,000 11.7 13,414 7,738 106.8 -42.3 8.3 14.3 4.3 0.6 Samsung F&M 000810.KS Financials O 269,000 330,000 22.7 22,813 26,074 22.6 14.3 11.8 10.3 9.6 0.9 Samsung SDS 018260.KS IT N 126,000 120,000 -4.8 5,990 6,040 5.5 0.8 21.0 20.9 9.0 1.8 Samsung SDI 006400.KS IT N 115,500 99,000 -14.3 3,192 5,828 438.7 82.6 36.2 19.8 3.9 0.8 SEMCO 009150.KS IT O 56,700 66,000 16.4 202 3,320 35.0 1,540.9 280.3 17.1 5.6 0.9 Samsung Heavy 010140.KS Industrials NC 10,400 n.a. n.a. -345 217 n.m. n.m -30.2 48.0 1.4 0.6

Hyundai Motor Group MSCI Price (KRW) Upside EPS (KRW) EPS Growth (%) P/E (x) ROE (%) P/B (x) Company Ticker Sector Rating Local Target to TP (%) 16E 17E 16E 17E 16E 17E 17E 17E Hyundai Motors 005380.KS Cons. Disc. O 139,500 163,000 16.8 18,938 21,539 -15.8 13.7 7.4 6.5 8.9 0.6 012330.KS Cons. Disc. O 242,000 345,000 42.6 31,205 36,045 -1.5 15.5 7.8 6.7 11.8 0.8 Kia Motors 000270.KS Cons. Disc. N 36,400 40,000 9.9 6,795 5,815 4.7 -14.4 5.4 6.3 8.7 0.5 004020.KS Materials O 58,200 71,000 22.0 6,257 7,141 11.2 14.1 9.3 8.2 5.7 0.5 Hyundai Glovis 086280.KS Industrials N 155,500 140,000 -10.0 13,483 14,739 34.1 9.3 11.5 10.6 14.9 1.5 Hyundai E&C 000720.KS Industrials N 41,550 42,000 1.1 4,399 4,634 33.3 5.3 9.4 9.0 8.0 0.7 Hyundai Wia 011210.KS Cons. Disc. N 64,600 62,000 -4.0 4,807 7,341 -60.0 52.7 13.4 8.8 6.0 0.5

Lotte Group MSCI Price (KRW) Upside EPS (KRW) EPS Growth (%) P/E (x) ROE (%) P/B (x) Company Ticker Sector Rating Local Target to TP (%) 16E 17E 16E 17E 16E 17E 17E 17E Lotte Chemical 011170.KS Materials NC 376,500 n.a. n.a. 49,108 52,409 66.7 6.7 7.7 7.2 18.4 1.2 Lotte Shopping 023530.KS Cons. Disc. N 226,500 220,000 -2.9 10,131 12,069 n.m 19.1 22.4 18.8 2.2 0.4 Lotte Confectionery 004990.KS Cons. Staples NC 204,000 n.a. n.a. 6,382 7,493 19.4 17.4 32.0 27.2 4.0 1.1 Lotte Chilsung 005300.KS Cons. Staples NC 1,449,000 n.a. n.a. 68,381 68,678 -6.8 0.4 21.2 21.1 3.7 0.8 Lotte Himart 071840.KS Cons. Disc. NC 41,950 n.a. n.a. 4,737 5,182 4.9 9.4 8.9 8.1 6.3 0.5 Lotte Food 002270.KS Cons. STaples NC 629,000 n.a. n.a. 43,348 49,502 18.1 14.2 14.5 12.7 7.0 0.9 Lotte Insurance 000400.KS Financials NC 2,420 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Note: O = Outperform, N = Neutral, U = Underperform, NC = Not covered. Priced as of 31 January 2017. In order of market cap. Source: Company data, Thomson Reuters I/B/E/S estimates for NC companies, Credit Suisse estimates for rated companies

Korea Market Strategy 4 2 February 2017

Table of contents

Focus tables 2

Unwinding Korea’s discount 3

Sector valuation table 4

Potential upgrade of Korea's corporate governance could lead to a rerating 6

Samsung Group: Reshuffling process may be accelerated 21

Hyundai Motor Group restructuring 38

Three restructuring scenarios for HMG 44

Scenario 1: HMC, Kia, and Mobis to split into Holdco and Opco followed by the three Holdcos' merger 46

Scenario 2: Mobis to split into Holdco and Opco 53

Scenario 3: HMC to split into Holdco and Opco 57

Lotte Group: Value accretion from Holdco formation already in the price 63

Samsung Electronics (005930.KS / 005930 KS) 77

Hyundai Motor Company (005380.KS / 005380 KS) 79

Prefer HMC under HMG restructuring angle 79

Hyundai Glovis (086280.KS / 086280 KS) 81

Stagnant growth with rising uncertainty 81

Lotte Shopping (023530.KS / 023530 KS) 83

Holdco formation could be value accretive despite uncertain consumption outlook 83

Appendix: Political landscape in Korea 85

Korea Market Strategy 5 2 February 2017

Potential upgrade of Korea's corporate governance could lead to a rerating Proposed regulations related corporate governance The current 20th National Assembly has proposed a slew of bills related to corporate governance in Korea. Some of the bills have been pending at the National Assembly for some time, even from the previous session. Hence, gauging the probability of the final approval of those bills is difficult. However, given the recently heightened political issue and public attention to economic democratisation, we believe those bills should get greater sentiment support than before. If the regulation changes lead to corporate governance reform, we believe it would improve the capital management of Korea's corporates and offer an opportunity for unwinding Korea's valuation discount. We have categorised those proposed regulations according to their impact on corporate governance. ■ Improve ownership structure and limit controlling shareholders' access to corporate capital at the expense of minority shareholders. ■ Reinforce fiduciary duty and expertise of National Pension Service Investment Management (NPSIM). ■ Reform the Board of Directors (BoDs) to enhance independence and monitor and prevent conflict of interest between controlling and minority shareholders. Please see the appendix on page 74 for the current political landscape in Korea. Proposed regulations to improve ownership structure and limit controlling shareholders' access to corporate capital Cross-shareholding structure allows controlling owners to expand their business utilising the parent companies' capital to control the whole group. The cross-ownership structure to expand business has not always resulted in value accretion of the parent company as sometimes acquisitions were made to strengthen ownership of controlling shareholders. Some cross-shareholdings were created after the Asian Financial Crisis, in 1997, in order to lower financial leverage or bail out companies from the debt workout programme. However, as Korea recovered from the crisis and the economy matured, various regulations were put in place. In 2014, a bill was passed to prohibit new cross-ownerships. A new bill is now being proposed to unwind all existing crossing holdings. Treasury shares in Korea are often repurchased without cancellations. They are sometimes used to enhance ownership of holdcos or resold to friendly shareholders to win proxy competition. New regulation is pending to limit such transactions as they could dilute the value of minority shareholders. Lastly, the regulation on intra-group revenue transactions is proposed to be tightened. Unwinding of cross-shareholding In July 2014, a law was enacted to prohibit new cross-shareholding structures. During the presidential election, more severe regulation on cross-shareholding was pledged by both parties. In the past few years, some of the cross-shareholdings have been unbundled. Un Yeol Choi, a member of the Democratic Party, submitted a bill to force the unwinding of all existing cross shareholdings by large size conglomerates within three years. Otherwise, the company or shareholder will be subject to fines, suspension of voting rights, or prison time of three years or less. More strict classification of holding company If a parent company owns "subsidiaries" with aggregate "book value" of more than 50%, it is classified as a holding company and regulated under the law (e.g. requirement of ownership of subsidiaries). Some parent companies with a de-facto holding company role are exempt from the current regulation. The pending bill will amend the definitions of holding company in order to prevent any side-effect of the current holding company regulations. As stated in the draft of the bill, the current regulation leads to strengthening of corporate control by majority shareholders or market concentration.

Korea Market Strategy 6 2 February 2017

The new regulation, if enacted, will force a parent company to be classified as a holding company, if the aggregate "fair value" of "affiliates" is greater than 50% of total assets. "Affiliate" is a broader term as it includes all companies in the same group influenced by a company or person while "subsidiary" is only those affiliates with the largest ownership. Increasing ownership requirement of subsidiaries In Korea, existing holding companies often trade at a discount to operating companies. We believe one of the key reasons is due to low ownership of the subsidiaries. The minimum requirement of subsidiary ownership currently is 20% (40% for unlisted companies). The bill increases the ownership requirement to 30% from 20% (50% for unlisted companies). Limitation on leverage of holding company Bank holding companies are regulated by a double leverage limit, which limits the aggregate NAV of subsidiaries to be less than 120% of the holding companies' parent- based equity. Non-financial holding companies can leverage up to 200% of their shareholders' equity. The bill will limit the debt ratio to 100%. Strengthening regulation on grand subsidiaries One of the key purposes of the holding company structure is to improve transparency of the ownership structure by streamlining subsidiaries. However, there have been many cases where large corporate holding companies have taken advantage of the subsidiaries' capital to expand into new, irrelevant industries. A member of the National Assembly, I Bae Chae, submitted a bill to prohibit subsidiaries' acquisition of grand-subsidiaries that do not have business relevance. Also, the bill would outlaw ownership of a grand-subsidiary by more than one subsidiary. Restriction on treasury shares on spin-offs Ideally, the key objectives of share buyback are cancellation, support share price when the stock is trading at a discount, and/or accretive M&As, including share-swap to increase ownership in profitable subsidiaries. However, treasury shares in Korea have more often been used for the interests of controlling shareholders. After holding companies are spun off with treasury shares of the operating company, the treasury shares could own a stake in the operating company. This leads to enhancement of ownership structure after transformation into a holding company structure. Thus, the bill restricts distributing treasury shares to new shares. According to the draft of the bill, controlling shareholders have been resorting to such expedients since the deregulation of treasury shares in 2011. This results in unfair treatment of minority shareholders. The bill was submitted by Yong Jin Park, a member of The Democratic Party. According to a local media report (Chosunbiz on 18 July 2016), the Fair Trade Commission also shares the view that such use of treasury shares is unfair to minority shareholders. Prohibition on sale of treasury shares to a select party Under the current law, the process for the sale of treasury shares follows articles of incorporation or approval from the board of directors. According to the pending bill, which was submitted by Young Sun Park and nine others, even if buyers of treasury shares are "unfair," no one is legally responsible under the current law, despite the fact that it could materially change the ownership structure. During her interview with MoneyToday on 3 August 2016, Young Sun Park said that if treasury shares are sold to select friendly shareholders to enhance ownership, it could create controversy on fairness to all shareholders.

Korea Market Strategy 7 2 February 2017

The bill requires that sale of treasury shares be evenly distributed to the shareholders, unless it is purported to achieve corporate strategy such as deployment of new technology or improvement of the financial structure. In addition, if treasury shares are initially acquired for special reasons other than shareholder return, such shares need to be divested within a certain period of time. Intra-group sales transactions The Fair Trading Act was revised in 2013 to regulate intra-group sales transactions. However, the rule was considered too lax or vague. Currently, the minimum ownership by he majority shareholder and its special parties to be subject to the regulation is 30%. Dong-chul Kim (The People's Party) submitted a bill to strengthen this regulation by reducing the minimum ownership to 10% from the current 30%. Two other National Assembly members also drafted similar bills to lower ownership to 20%. The bill also specifies exemption cases in more detail. Figure 7: Korea—proposed bills to limit ownership's access to corporate capital and cross-shareholding Act Category Proposed bill Congressman Fair Trading Act Cross ownership ■ The proposed bill forces to unwind all existing cross shareholding of large groups within three Un Yeol Choi, Minjoo (24) years. ■ If cross shareholding exists after three years, voting right will be removed with a fine or jail time. Fair Trading Act Holding company ■ The legal definition of holding company is based on the value of subsidiaries. Thus, some de- I Bae, Chae, People's (20) facto holding companies are not subject to the holding company regulation. The bill proposes to change from value of "subsidiaries" to value of "affiliates." ■ Limit the leverage (debt-to-equity) of holding company to 100% from current 200% (grace Chan Dae, Park, Minjoo (10) period of two years). ■ Require minimum ownership of subsidiary to 50% from current 40% (to 30% from current 20% for listed companies). ■ Require minimum ownership of subsidiary to 50% from current 40% (to 30% from current 20% for listed companies). ■ Grand subsidiary cannot be owned by multiple subsidiaries (two years of grace period). Commerce Act Treasury shares ■ Treasury shares, transferred to a new company after spin-off, cannot own shares of the parent Yong Jin, Park, Minjoo (10) company. Corp. Tax Act Treasury shares ■ Capital gains on treasury shares at the time of spin-off will be subject to the corporate tax. Young Sun, Park, Minjoo (10) Commerce Act Treasury shares ■ When resale of treasury shares, the shares need to be evenly sold to the all shareholders in Young Sun, Park, Minjoo (10) accordance with the ownership. Fair Trading Act Intra-group. transactions ■ Intra-group transactions by refrain SMEs from opportunity for fair competition. Dong Cheol, Kim, People's (10) ■ Current regulation on intra-group transaction is applicable to greater than 30% ownership (20% same bill proposed by 2 others of unlisted) by affiliates. ■ The ownership will be reduced to 20% (10% by Dong Cheol Kim) from current 30% and the stake will be inclusive of the same person or party. Note: * The numbers in the bracket refer to the number of congressman who issued the bill together. Source: Maeil Economy, Chosunbiz, Ministry of Government Legislation, Credit Suisse research Reinforcing expertise and fiduciary duty of National Pension Service NPF to have significant exposure to domestic equity market The total assets under management of the National Pension Fund (NPF) are close to W550 tn as of October 2016, which is expected to grow to W1,000 tn in the next five years (2022). Currently, investment in the domestic equity market is W99 tn or 18% of the total AUM. NPF sets five-year plans for asset allocation. The weighting of domestic equity is around 20% until 2020. As such, NPF's stake in the local equity market is expected to be 20% of the total AUM, W1,000 tn. NPF already holds large stakes in several Korean companies and thus could have an impact on the corporate governance of Korean companies.

Korea Market Strategy 8 2 February 2017

Figure 8: Korea NPF—assets under management Figure 9: Korea NPF—current asset allocations

(KRW tn) Cash and Cash Others Equivalents 0.3% 1,200 0.1%

Alternative Global Fixed Investments 1,000 Income 10.8% 4.1% Domestic Equities 800 18.2%

600 Global Equities 14.2%

400

Domestic Fixed 200 Income 52.3%

0 1998 1999 2003 2006 2009 2012 Oct. 2016 2022E

Assets under management

Source: National Pension Service, Credit Suisse research Source: National Pension Service, Credit Suisse research

Figure 10: Korea NPF—target asset allocation (by Figure 11: Korea NPF—large cap stocks with >5% 2020) ownership

12%

Global Fixed Alternative Income Investments 10% around 5.0% over 10.0% Domestic Equities 8% around 20.0%

6%

Global Equities around 20.0% 4%

2%

Domestic Fixed 0%

KEPCO KB FG KT&G SK Hynix Hyundai Motor NAVER Samsung C&T POSCO Hyundai Mobis Samsung Life Shinhan FG Amore Pacific LG Chem SK Telecom SK Holdings Kia Motors SK Innovation LG H&H Lotte Chemical Income Samsung Elec around 45.0%

Source: National Pension Service, Credit Suisse research Note: As of 31 January 2017 Source: WISEfn, Credit Suisse research

Potential regulatory changes of NPS to bring positive influence on Korean equities Given its increasing ownership of Korean listed companies, the role of NPF has long been under debate. By local law, NPF's rights for general voting, derivative legal suits, class legal suits, and shareholder engagement are the same as those of other minority shareholders. However, since NPF is under the government ministry, having too much capacity to influence companies may harm the independence of private entities. At the same time, the investment performance of NPF is critical as it is a source of income for Korea retirees. Also, given the size of the fund, it needs to have diversification and exposure to a broader equity market with a long-term investment horizon.

Korea Market Strategy 9 2 February 2017

Currently, "the Minister of Health and Welfare leads overall governance of the fund management together with the National Pension Fund Management Committee," according to National Pension Service. National Pension Service Investment Management is the division under the NPS, which is governed by the Minister. The National Pension Fund Management Committee (NPFMC) consists of outside members, representing different interests of the public and users. However, final investment decisions are made by the Investment Management Division or the Ministry of Health and Welfare. For voting decisions, NPF may refer to a sub-committee, consisting of public representatives under the NPFMC. However, the final decision does not have to be in line with the committee's recommendation under the current law. In fact, the Vote Review Sub-committee was not referred for any voting decisions taken by NPF in 2016.

Figure 12: Korea NPF—governance structure Submit to the Cabinet Council for approval by Cabinet Council / National Assembly the President President

Report Outline / guidelines for Ministry of Strategy and the fund management Ministry of Health and Fund management National Pension Fund Finance plans Welfare guidelines Management Committee Submission / discussion about the fund management plans In-depth discussion / preliminary review Report

Board of Audit and National Pension Fund Inspection of Korea Evaluation Committee Report Periodic audit and inspection Audit / inspection of State Affairs conducted by the National Pension Service National Assembly

Policy proposals Daily audit National Pension National Pension Service Auditor Research Institute Evaluations Investment Management Compliance Composed of experts in each field

Source: National Pension Service, Credit Suisse research

Figure 13: Korea NPF—NPF Fund Management Committee Chairman ■ Minister of Health and Welfare ■ "Vice Minister of Strategy and Finance, Vice Minister of Agriculture, Food, and Rural Affairs, Ex Officio Members (5) ■ Vice Minister of Trade, Industry, and Energy, Vice Minister of Employment and Labour, ■ Chairman of the National Pension Service" ■ Chief of Korea Institute for Health and Social Affairs, Chief of Korea Development Institute, and one nominee from each of the following: ■ Korea Employers Federation (KEF), Korea Federation of SMEs (KBIZ) ■ Federation of Korean Industries (FKI), Federation of Korean Trade Unions, Korean Confederation of Trade Unions Appointed Officials (14) ■ National Agricultural Cooperative Federation (Nonghyup), National Federation of Fisheries Cooperatives (Suhyup) ■ Two certified organisations (i.e. Korean Institute of Certified Public Accountants) ■ Korea National Council of Consumer Organisations, Citizens United for Better Society Source: National Pension Service, Credit Suisse research

Five members of the National Assembly, both from the conservative and liberal parties, proposed new regulations for the National Pension Fund. Thus, it is highly likely that the law will be amended. Among the bills submitted, we believe increasing transparency and independence decision-making for voting are likely to be the most important. Also, the expertise of management and the committee are important for NPF to be more effective in improving corporate governance.

Korea Market Strategy 10 2 February 2017

Figure 14: Korea—pending bills related to National Pension Act Act Article No. Category Proposed bill Congressman Article 30, Clause 2 National Pension Service ■ Appointment of the Chairman and directors of the Board requires "Yoon Kyung, Jae, congressional hearing. Minjoo (15)" Article 31, Clause 1 ■ Strengthen the qualifications (knowledge and experience) of directors. National Pension Act Article 105, Clause 1.6 ■ Legally mandate establishment of specialised committees (i.e. Voting decision committee). Article 105.2 ■ Disclose meeting minutes by the specialised committee to improve transparency of decision making process. "Article 104.2 National Pension Service ■ Establish "Shareholder Rights Enforcement Committee," which will "Seung Hee, Kim, Article 107, Clause 4" be responsible for (1) pre-approval of voting decisions and (2) Saenuri, (10)" National Pension Act enact standard, method and procedures of voting. ■ Disclose details of exercising the shareholding rights. Article 31.2, 103.3 National Pension Service ■ Legally oblige fiduciary duty, which prioritise the interest of pension "I Bae, Chae, members, to the directors of NPF and of the NPF Management People's (16)" Committee. Article 31.3, 103.4, 128 ■ Prohibit directors and the members of NPF Management Committee from pursuit of personal interests. Violation will be subject to the criminal charge. Article 103.5, 103.6, 128 ■ Unlawful influence on management of the Fund will be subject to National Pension Act criminal punishment and legally liable for any damages or loss. Article 103.6 ■ Directors and committee of NPF Management will be legally liable for loss, same as the Commerce Law. Article 103.7 ■ Enact special Act for NPS when calculating loss or damages to be compensated. Article 128.2 ■ Wealth obtained in violation of (1) personal interest and (2) engaging unlawful influence will be confiscated. Article 31.2 National ■ Rights to recommend directors by NPF Management Committee. Mi Hyuk, Kwon, Article 102.4 Pension Service ■ Shareholders' rights will be exercised stipulated by the NPF Minjoo (23) Management Committee for companies with more than 3/100 ownership. Article 103.2 ■ At least one director represents SMEs at NPF Management Committee, and to grant recommendation rights to the Speaker of the National Assembly to nominate four member of the committee. National Article 103.2 ■ NPF Management Committee meeting should be held at least once Pension Act a month, and the agenda should be presented to the members seven days before the meeting. Article 103.2, 103.4 ■ Regulate the request of agenda of NPF Management meeting. Maintain meeting minutes and make public disclosure. Article 104.2, 105.1 ■ To establish the basis of the law pertaining to the composition and operation of the National Pension Fund's Special Committee and to specify the liability of the institutional investor. Source: Maeil Economy, Chosunbiz, Ministry of Government Legislation, Credit Suisse research

Proactive steps to improve shareholder returns Indeed, NPF has been taking steps to improve corporate governance, although these have not been comprehensive. As public sentiment has been more supportive of NPF’s independence and focused on its investment performance, we believe the fund could become more proactive on shareholder engagement. The potential reform of NPF's governance could strengthen the fund's role to maximise return to shareholders, in our view, in particular as the economy is maturing and capital gains from growth are unlikely to be as strong as past. NPF's role as a shareholder to intervene in a private company's shareholder return policy has been considered a sensitive issue, again as the NPF is a government entity. In 2014, Korea Capital Market (Research) Institute (KCMI) and NPS hosted a public debate forum to discuss NPF's policy on its invested company's dividends. In June 2015, the NPF Management Committee released the final guideline for NPF's role on dividend policy.

Korea Market Strategy 11 2 February 2017

Figure 15: Korea—guidelines for NPF's engagement on dividend policy Category Guidelines Committee Ex-post Supervision Exercising voting rights "(Target) Corporate that has value destructive dividend policy. NPS Investment Management Voting Guideline Sub-Committee (Guidance) Reject vote against agenda on dividend." Discussions with corporates "(Target) Companies without dividend policy or which do not follow National Pension Service Voting Guideline Sub-Committee dividend policy. Investment Management * Low dividend paying companies and companies that NPF reject dividend agenda are subject to priority review. (Guidance) Discuss with companies to urge establishment of value accretive dividend policy." Designate and disclose "(Target) Corporates that do not improve their dividends by the "National Pension Service "Voting Guideline Sub-Committee corporates that need to be following year's AGM even after discussion with NPF. Investment Management Exception: National Pension Fund focused on (Guidance) Designate as a ""focus corporate"" and advise them to Exception: Voting Guideline Sub- Management Committee after the continuously improve their dividend policy. Committee after the list is list is disclosed" * As a rule, the list of corporates that are designated as ""focus disclosed" corporates"". However, if there is no improvement in the dividend policy by the following year's AGM, the voting guideline sub- committee may decide whether to disclose the list." Request for participation in "(Target) Of the corporates that are designated as a ""focus Voting Guideline Sub-Committee National Pension Fund Management shareholder proposal corporate"", if other shareholders request shareholder engagement. Committee (Guidance) Voting Decision Committee participates on shareholder engagement if considered appropriate." Source: Ministry of Health and Welfare, Credit Suisse research

Since the establishment of the guideline, the number of decline votes by NPF on dividend policy have significantly increased. According to the data released by Korea's Corporate Governance Service, NPF's rejections had some impact on the increase in dividends in the following year.

Figure 16: Korea NPF—the number of rejection Figure 17: Korea—no. of companies' dividend policy votes on dividends change in t+1 following NPF's rejection vote

25 4.5% 25

4.0%

20 20 3.5%

3.0% 15 15 2.5%

2.0% 10 10 1.5%

1.0% 5 5

0.5%

0 0.0% 0 2012 2013 2014 2015 2016 Increase No Change Decrease

# of Disapprovals Disapproval Rate (RHS) Div amount Div yield

Source: Corporate Governance Service, National Pension Service, Credit Suisse research Source: Corporate Governance Service, National Pension Service, Credit Suisse research

Korea Market Strategy 12 2 February 2017

More fiduciary institutional investors The rights of minority shareholders should be primarily protected by the board of directors or legal restrictions. However, Korea's boards have been considered less effective in monitoring controlling shareholders. While some efforts are being made to improve transparency and independence of the BoDs, we believe the improvement could be achieved through structural changes. (We will discuss BoDs in the following session.) Thus, the role of institutional investors is important to actively prevent value destructive corporate transactions made by management or controlling shareholders. We believe demand for more proactive involvement by institutional shareholders is needed to improve corporate governance, given the maturing economy and an ageing population. Institutional investors in Korea are passive in exercising shareholders' rights. The Capital Market and Investment Act 87, which was revised in 2013, reinforces the voting practice of institutional investors. However, the law only states: "Fund investors must exercise voting rights to protect the wealth of investors," and does not have any concrete regulations. Of the total voted agenda of 19,123 in 2015, declines by institutional investors numbered only 1.5%—much lower than the recommendations by Korea CGS (19.4%), National Pension Fund (14.5%), and foreign pension funds (11.0%), according to Korea CGS. We believe there are several reasons for the passive voting by local institutions.

■ Concentration of AGMs in Korea. Most f AGMs in Korea are held concurrently. We believe many domestic institutions do not have sufficient resources to review the agenda and participate in the voting.

■ Investors have largely been pursuing capital gains as growth has been strong. Thus, corporate governance, including shareholder returns, have been less focused on by both retail and institutional investors. In our view, the structural headwind of an ageing population is likely to constrain macro- economic growth, in particular domestic demand. Unless there is a strong recovery in global demand, searching for capital gains from equity investments will become more difficult. At the same time, the increasing population of retirees would need more liquid financial assets given their currently heavy exposure to real estate. Thus, even though at a modest pace, the importance of corporate governance will continue to be emphasised. One of the pending bills requires electronic voting by companies with a certain number of shareholders. This could accommodate the exercise of voting rights by institutional and retail investors, in our view. The law on electronic voting was first enacted in 2015 as a requirement for shadow voting. There are currently 106 companies that allow electronic voting. However, most of them are small-sized companies. BoDs reform to enhance independence In our view, Korea's substandard corporate governance could largely be attributable to the conflicts of interest between the controlling and minority shareholders. The primary function of the board of directors is to monitor conflicts of interest for minority shareholders. However, it has broadly and long been known that Korea's boards have not been independent or responsible. In 2016, 99.6% of the voted agenda at board meetings was approved while only 0.05% was rejected. According to Korea Corporate Governance Service, out of 949 items on the AGM agenda on the election of directors, 244, or 25%, were considered inappropriate due to conflicts of interest, relationship with controlling shareholders, and/or employment at the company or affiliates. In detail, 44% had relationships with the company and 32% were working as senior management of a company that had economic interests in the firm. Of those nominated, 25% had been outside directors for more than 20 years.

Korea Market Strategy 13 2 February 2017

Board practices have long been regulated by laws in Korea. Since the Asian Financial Crisis, Korean law has required large listed companies to appoint outside directors to account for more than half of the board. In order to reinforce the independence of the board, it is mandatory by the Commercial Act to appoint a committee for audit and an outside director nomination committee.

Figure 18: Korea—development of regulation on Figure 19: Korea—average percent of outside outside directors directors on BoDs (large corporates)

Period Event Reference 51% Feb. 1998 ■ KOSPI IPO regulation required the Securities Listing appointment of outside directors (at least one Regulations 50% or more outside directors and 1/4 of the total number of directors). 49% Jan. 2000 ■ Legalized the outside director system in the Securities and Securities and Exchange Act. Exchange Act 48% ■ Mandatory appointment of outside directors for large listed companies (asset size over W2 tn). 47% ■ Outside directors must be at least three and 1/2 of the total number of directors." 46% Mar. 2001 ■ To mandate the appointment of outside Securities and directors for listed companies in the KOSDAQ Exchange Act 45% (excluding venture capital with asset size less than W100 bn). 44% Mar. 2009 ■ Transfer of outside director regulations from Commercial Act 2010 2011 2012 2013 2014 2015 2016 the Securities and Exchange Act to the % of Outside directors Commercial Act.

Source: Fair Trade Commission, Credit Suisse research Source: Fair Trade Commission, Credit Suisse research

The current ineffective BoDs are partly attributable to the nomination process, in our view. Existing regulations on nominating and electing outside directors are not rigid enough to fend off influence from controlling shareholders or exclude directors with possible conflict of interest with minority shareholders. As such, some of the pending bills aim to address and strengthen the independence of the BoDs. Improving independence of outside directors I Bae Chae, a member of People's Party, submitted a bill to amend the Commerce Act, which reinforces outside BoDs nominations and election process. Also, Jong In Kim, from Minjoo Party, drafted a similar bill although less strict.

■ According to the current law, an outside director may not have worked at the company or other entities with economic interests in the company in the past two years. The amended law will prohibit employment at the company and its affiliates in the past five years from the current two years. Additionally, the term of director would be limited to six years at the same company and nine years including the affiliates.

■ Currently, it is required to have an outside director nominating committee. The same bill proposes to exclude controlling shareholders and affiliates from the committee.

■ Lastly, minority shareholders with at least 3% of ownership for six months and longer would be guaranteed a say in appointing outside directors.

■ When electing two or more directors, minority shareholders must be entitled to cumulative voting. Currently, cumulative voting is not required if ruled out from the corporate's article. The law, if passed, would legally require the voting. Derivative law suit Under the local Commerce Act 403, minority shareholders with 1% ownership can file a derivative law suit against directors of the company if the director is responsible for loss. The derivative litigation has not been effective in protecting minority shareholders' rights.

Korea Market Strategy 14 2 February 2017

In cases where directors are found guilty, it is the company's responsibility to ask directors to compensate for the loss. However, as the relation between the company and directors is often close, the company does not take any further action. In our view though, the recently heightened political issue and potential reform of the board, could change the company's follow-up action after a derivative legal suit is filed. Additionally, one of the bills proposed by the Minjoo Party seeks to allow shareholders to file litigation against directors of subsidiaries where that director is responsible for value destruction of the subsidiaries. According to the bill, minority shareholders, with at least 1/100,000 ownership, can file a derivative law suit against directors of subsidiaries if they have led to value deteriorating transactions. I Bae Chae proposed an easier rule for the derivative law suit against subsidiaries with at least a 30% stake. It looks like minority shareholders are gaining more rights. Figure 20: Korea—proposed bills related to BoDs reform Act Category Proposed bill Congressman Commerce Act Outside BoD ■ It is difficult to achieve independence of non-standing director under the current law as there are I Bae, Chae, People's (14) larger proportion of BoD members with interest in the company. ■ Outside director may not have worked as a director, management, auditor, or employees at the Jong In, Kim, Minjoo (122) company or affiliates in the past five years. ■ Outside director may not have served as outside director for more than six years at the company or nine years including the affiliates. ■ Controlling shareholders and the related party may not be a member of outside director nominating committee. ■ Large listed companies must appoint an outside director recommended by a shareholder with 3% or greater than ownership for at least six months. ■ ESOP union or minority shareholders are entitled to appoint outside director. ■ entitled to cast cumulative vote (cannot be forbidden by articles of incorporation). ■ When electing two or more directors, minority shareholders will be entitled to cast cumulative vote (cannot be forbidden by articles of incorporation).

Commerce Act Derivative legal ■ Shareholders of parent company can file a lawsuit against directors of subsidiaries with 30% I Bae, Chae, People's (14) suit ownership. ■ Parent company gain rights to access accounting report of subsidiaries. ■ Shareholder with 1/100,000 ownership for six months can file derivative lawsuit. Commerce Act Voting method ■ Listed companies with a certain number of shareholders are required to accept for their Jong In, Kim, Minjoo (122) shareholders' meeting electronic or written votes to shareholders. Source: Maeil Economy, Chosunbiz, Ministry of Government Legislation, Credit Suisse research] Base case: Expediting ownership restructuring and potential holdco transitions The fact that these bills have been submitted should expedite the process of ownership structure reshuffling. After the bills are passed by the National Assembly, restructuring could be more complicated and involuntary as seen in Figures 21-23. We conducted scenario analysis of Samsung, Hyundai Motor, and Lotte group.

Korea Market Strategy 15 2 February 2017

Figure 21: Samsung Group—impact on ownership structure from regulation changes Regulation category Current ownership In the process of After completion of Remarks structure ownership restructuring holdco transition Status quo Amended Status quo Amended Status quo Amended Cross ownership N Y N N N N CS’s 5+3+2 step scenario clears current circular ownership Holding company N N Y Y N N CS’s 5+3+2 step scenario would satisfy most conditions even if the bill is implemented Treasury shares N N N Y N Y SEC HoldCo may not have enough stake for control in SEC OpCo if this bill is implemented Intra-group transactions Y Y N N Y Y Samsung C&T's revenues to other Samsung Group affiliates can be affected if the bill is implemented Source: Credit Suisse estimates

Figure 22: Hyundai Motor Group—impact on ownership structure from regulation changes Regulation category Current ownership In the process of After completion of Remarks structure ownership restructuring holdco transition Status quo Amended Status quo Amended Status quo Amended Cross ownership Y Y Y Y N N We assumed cross holdings to be all disconnected Holding company N Y N Y Y Y We assumed the new HMG holdco to own minimum 30% of listed affiliates Treasury shares N Y N Y N Y HMG does not necessarily need to utilize treasury shares to form the holdco Intra-group transactions Y Y Y Y Y Y Glovis can be affected if the bill is implemented Source: Credit Suisse estimates

Figure 23: Lotte Group—impact on ownership structure from regulation changes Regulation category Current ownership In the process of After completion of Remarks structure ownership restructuring holdco transition Current Amended Current Amended Current Amended Cross ownership N Y N N N N Our scenario assumes most cross holdings will be untangled Holding company N N N N N N All listed affiliates are at least 40% owned by related affiliates/owner family Treasury shares N N N N N N Lotte does not necessarily need to utilize treasury holdings to form the holdco Intra-group transactions N N N N N N This issue is not so relevant to Lotte Group Source: Credit Suisse estimates

Based on our scenario analysis on ownership restructuring, we believe a holdco transition would be the most feasible. Samsung Group: Regardless of the final outcome of the recent political scandal in Korea, we believe Samsung Group will continue its reshuffling efforts, not only to help enhance the controlling family’s governance power in the group but also to significantly reduce the gap between the controlling family's interest and that of the minorities in the longer term. Indeed, given (1) the enhancing trend of governance structure-related regulations in Korea of late and (2) increasing requests for a transparent governance structure, we think that Samsung Group may accelerate the speed of its remaining reshuffling. After all, we believe that Samsung Group would eventually comprise of a dual-layer holding company structure after a split-up of Samsung Electronics (SEC) into a holding company and an operational company, which appears the optimal way to meet key requirements for the reshuffling works with minimised reputational risk for the family/group.

Korea Market Strategy 16 2 February 2017

Hyundai Motor Group: HMG has long been known for its complicated circular holding structure. Yet, given (1) the number of new bills that have been proposed by political parties under the justification of 'Economic Democratisation', (2) multiple conglomerates including Samsung, Hyundai Heavy, SK having begun group restructuring, and (3) a rising need for improved holding structures for better corporate governance by financial investors including activist funds, we think it is time to assess the realistic holding structure change scenarios for HMG to find opportunities and minimise risks. We provide three different scenario analyses and believe splitting three companies (HMC, Kia, and Mobis) into holdco and opco followed by the three holdcos' merger would be the most suitable scenario for the group. For the HMG restructuring, the market has long been speculating that Mobis' value should be discounted so that ES Chung can acquire Mobis at a cheaper price with higher ownership under Mobis' holdco scenario. Yet, as such speculation will no longer be valid post the implementation of any restructuring, we expect Mobis to be rerated. In contrast, as the group restructuring requires the Chung family's Glovis share swap to get the new holdco shares, Glovis will eventually lose the owner's (Chung family) premium, which is a negative for the stock. Lotte Group: Lotte Group Chairman's announcement to improve group transparency, and the potential regulation change on holdcos could be strong incentives for Lotte Group to accelerate the procedure to form a holdco. Lotte Group is different from other major Korean conglomerates in that the key affiliate companies are heavily owned by the owner family/affiliates but complicatedly cross-held. This implies the group will have multiple options to maximise the major shareholders' ownership without much affecting minority shareholders' interests. We expect the initial step would be to merge Lotte Shopping and Lotte Confectionery, and the combined entity to form a holdco. This process of asset reshuffling should unlock value, given its current complex holding structure; hence our upgrade to NEUTRAL from the previous Underperform rating. We think the holdco transition would be most positive for the share price of Samsung Electronics, Hyundai Mobis. However, we stay cautious on Lotte Shopping and Hyundai Glovis as minority shareholders are unlikely to benefit. In the case of full reform of corporate governance We believe it is in the best interests of minority shareholders and the share price of companies to optimise capital management. However, controlling shareholders sometimes have conflicts of interest with minority shareholders. In the past 20 years, Korea has mostly traded at a discount to Asia, excluding Japan. It is currently at a 20% discount which is not smaller than recent years. There is some correlation between the dividend payout ratio and P/E multiple. Again, Korea is trading at the lowest multiple and pays out less dividends than other countries in Asia. If the above bills are passed, we believe it would improve the capital management policy to better the interests of minority shareholders. This, in turn, could be a rerating opportunity for Korea. We believe the pending regulation changes seek three pillars of corporate governance. First, some bills restrict controlling shareholders' access to corporate wealth (i.e., capital). Not only will they be required to unwind all existing cross-shareholdings and enforce a holding company structure, but the existing holding company structure could also be upgraded if the holding company is required to increase ownership of subsidiaries while prohibiting acquisition of irrelevant grand-subsidiaries. Secondly, we also believe that the fiduciary duties and rights of institutional investors, including the National Pension Fund, could strengthen if the regulations are passed. Lastly and most importantly, some of the pending bills seek to reform the board of directors.

Korea Market Strategy 17 2 February 2017

Figure 24: Korea—long term valuation discount to Figure 25: Dividend payout ratio vs. 12M fwd P/E Asia ex-Japan (on 12M fwd P/E basis)

30% (12MF P/E, x) 20 20% Philippines 10% 18 India 0% Indonesia Hong Kong 16 -10% Malaysia Thailand -20% 14 Japan Taiwan Asia ex-Jp -30% Singapore 12 -40% China Korea

-50% 10

(2016E Dividend Payout)

-60%

Mar-96 Jun-97 Sep-98 Dec-99 Mar-01 Jun-02 Sep-03 Dec-04 Mar-06 Jun-07 Sep-08 Dec-09 Mar-11 Jun-12 Sep-13 Dec-14 Mar-16 Dec-94 8 0% 10% 20% 30% 40% 50% 60%

Source: Thomson Reuters Datastream, Credit Suisse research Source: Thomson Reuters Datastream, Credit Suisse research

Korea Market Strategy 18 2 February 2017

Credit Suisse HOLT® view (Note: Credit Suisse HOLT is not part of Equity Research) According to Credit Suisse HOLT, Korea's Cash Flow Return on Investment (CFROI®) came lower than cost of equity. Thus, a broad need for better capital deployment remains unchanged. Companies in the maturing or restructuring phase should benefit by reducing excessive cash or unnecessary investments.

Figure 26: Korea from industry life-cycle standpoint Increasing CFROI Fading CFROI Below Average CFROI CFROI

Asset Growth

Source: Credit Suisse HOLT

Based on Credit Suisse HOLT, excess capital (= excess cash + available for sale securities), Korea offers 30% upside if the excess cash drag on CFROI could be removed.

Figure 27: Korea—potential upside if unwinding excess cash (ex-Financial)

CFROI (As Reported) Excluding Cash Drag Excluding LT Marketable Securities Drag

14.0

12.0

10.0 37% upside assuming CFROI is 8.0 free from balance sheet drags

6.0 CFROI (%) CFROI

4.0 7% upside if current CFROI continues

2.0

0.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2016E 2017E 2018E 2019E 2020E

Source: Credit Suisse HOLT

Korea Market Strategy 19 2 February 2017

At the stock level, it may not be always the best to lower asset growth (reduce capex or M&A) and increase dividends. The incremental asset growth should be value accretive. Thus, Credit Suisse HOLT screened for the twenty largest stocks that could improve shareholders' value by reducing investment and spending more on dividends or share buybacks for cancellation.

Figure 28: Korea—20 largest wealth destructors with positive cash flow (ex- Financial) YoY decline in HOLT HOLT Fixed Charge 3Yr Median CFROI - 5Yr Normalized Economic Profit due to Coverage Ratio Discount Rate (%) Growth Rate (%) Asset Growth (LFY) (%) (2016E) (x) Negative Positive Negative Greater than 1.0x 1) Has the firm been 2) Has the firm kept 3) Did the firm continue 4) Is the firm's cash flows Name earning returns lower reinvesting over the such wealth destructive sufficient to cover than its cost of capital? past five years? growth last year? fixed charges*? HYUNDAI MOTOR -0.5 5 -91.6 1.2 SK HYNIX -1.1 3 -15.7 1.2 KEPCO -3.3 5 -6.2 1.0 SK TELECOM -4.7 3 -8.1 1.0 LG DISPLAY -6.2 6 -5.5 1.2 LG -1.4 5 -13.8 1.3 S-OIL -1.2 2 -0.8 2.1 LG ELECTRONICS INC. -3.3 4 -5.8 1.0 E-MART -3.7 5 -3.7 1.6 CJ -0.8 11 -4.0 1.1 -3.9 5 -4.5 1.1 HANWHA CHEMICAL -5.8 6 -1.0 1.3 GS RETAIL -0.6 4 -126.4 1.7 DOOSAN HEAVY INDUSTRIES AND CONSTRUCTION-1.0 2 -18.6 1.3 HANWHA -4.6 2 -17.5 1.2

Note: Fixed charges coverage ratio: gross cash flows / fixed charges; Fixed charges = Interest + dividends + capex + r&d expense + rent expense = Near-term fixed spending. Source: Credit Suisse HOLT

Secondly, Credit Suisse HOLT screened for the companies with excess capital, despite that the return justifies for organic growth.

Figure 29: Korea—20 largest stocks with sufficient cash flow but with excess capital (ex-Financial) Fixed Charge %P Change in Upside GCF/Sales, 3Y FCF/Sales, 3Y Cash % Gross Company Coverage Ratio (Excess Cash Median Median Inv. (2016E) (2016E) Removed Scenario) SAMSUNG ELECTRONICS 27.1 8.6 19.0 1.1 19 HYUNDAI MOTOR 10.5 2.5 21.6 1.2 41 SK HYNIX 53.1 11.4 6.2 1.2 5 HYUNDAI MOBIS 8.3 3.4 28.7 1.3 16 NAVER 38.6 15.7 45.9 1.6 61 AMOREPACIFIC 20.9 9.1 13.7 1.5 9 POSCO 9.7 1.5 7.6 0.7 32 SAMSUNG C&T CORPORATION 11.8 -41.5 5.4 0.9 51 LG CHEM 12.9 4.1 9.3 1.2 13 KIA MOTORS 8.8 0.7 18.4 1.1 24 SK TELECOM 30.0 4.5 3.8 1.0 9 SK INNOVATION 3.1 -0.7 16.9 1.2 20 LG HOUSEHOLD & HEALTH CARE 14.6 5.4 9.8 1.9 2 KT&G 27.1 13.6 17.9 1.6 14 SK HOLDINGS 7.7 0.8 9.8 0.8 15 CELLTRION, INC. 65.0 -40.2 4.9 3.1 1 LG DISPLAY 22.3 2.1 3.9 1.2 19 AMOREPACIFIC GROUP 18.3 8.6 22.8 1.6 2 LG 9.0 7.2 12.5 1.3 9

Source: Credit Suisse HOLT

If you need further information on HOLT, please contact the Credit Suisse HOLT team.

Korea Market Strategy 20 2 February 2017

Samsung Group: Reshuffling process may be accelerated Samsung Group’s Samsung Group's active reshuffling work in recent years (since late 2013) has been a two- reshuffling work will pronged strategy—operational and governance. not only help enhance the controlling family’s Samsung Group’s exit from the machinery/ chemical business with the disposal of its governance power in controlling stake in its machinery/ chemical affiliates to Hanwha Group in 2014 and Lotte the group but also Group in 2105 reflect the group management's enhanced focus on its core electronics significantly reduce the business. gap between interest of In the meantime, the merger between Samsung C&T and Cheil Industries in 2015 was one the controlling family of the key events for change in its governance structure, which has significantly enhanced and that of the the controlling Lee family's governance power on Samsung Electronics, although it minorities eventually appears still a long way before the Group’s governance structure assumes the final shape. Samsung Group may reconsider the schedule of the remaining major steps in the ongoing reshuffling process due to the political churn in Korea of late, implying increased uncertainty in the timing of the remaining major events within the reshuffling work. However, regardless of the final outcome of the ongoing scandal, we expect Samsung Group to continue the reshuffling work, which would not only help enhance the controlling family’s governance power in the group but also significantly reduce the gap between interest of the controlling family and that of the minorities. While the major restructuring events that have happened so far are irreversible, we fail to find a better alternative. Indeed, given (1) the improving trend of the governance structure-related regulations in Korea of late and (2) the increasing request for a transparent governance structure, we think Samsung Group may accelerate the remaining reshuffling work. Samsung Group’s final ownership structure after the completion of our reshuffling scenario would satisfy most of the related regulations/restrictions even if regulations/restrictions are further enhanced by proposed bills in the National Assembly currently. It is uncertain at the current stage how many of the proposed bills would be approved and implemented.

Figure 30: Samsung Group–governance structure reshuffling scenario by Credit Suisse (the essential five steps + the optional three steps + the optimal two steps) Steps Process The essential five steps Essential 1 A demerger of Samsung Electronics into a HoldCo and an OpCo Essential 2 1) SEC HoldCo’s acquisition of Life/F&M's 7.8%/1.3% stakes in SEC OpCo 2) SEC HoldCo’s acquisition of Samsung Group affiliates' (ex. C&T) stakes in non-financial affiliates of Samsung Group 3) Life's acquisition of Samsung F&M's 15.9% stakes in treasury Essential 3 Share swap of Lee family's 4.8%/17.0% stakes in SEC OpCo/SDS into shares of SEC HoldCo Essential 4 Share swap of C&T's stakes in non-financial Samsung Group affiliates into shares of SEC HoldCo Essential 5 Lee family’s (and other investors) acquisition of SDI, F&M, SEMCO's 6.2% stake in C&T The optional three steps after the completion of the essential five steps Optional 1 A demerger of Samsung Life into a financial HoldCo and an OpCo Optional 2 A demerger of C&T into an OpCo and a financial HoldCo (with stakes in Samsung Life) Optional 3 A merger between C&T financial HoldCo and Life financial HoldCo The additional two steps for an optimal structure in the long term after the completion of the 5+3 steps Optimal 1 A merger between C&T OpCo and SEC HoldCo Optimal 2 Share swap of Lee family's 20.8% stake in Life OpCo into shares of the Financial HoldCo

Source: Credit Suisse estimates

Korea Market Strategy 21 2 February 2017

Figure 31: Korea—key regulations related to the ongoing reshuffling process of Samsung Group Regulation Details Conditions for If a non-financial company’s total asset is >W100 bn, non-financial HoldCos and aggregated value of its stakes in its subsidiaries is >50% of its total asset, Then, the company automatically transits to a formal non-financial holdco, which is designated/regulated by FTC A non-financial HoldCo MUST maintain gross gearing of <200% MUST own >40% stakes in its subsidiaries (>20% for listed subsidiaries; Should also be the largest shareholder) NOT allowed to own >5% stake in non-affiliated companies NOT allowed to own any stake in other affiliates but its direct subsidiaries NOT allowed to own any share in financial/ insurance companies in Korea (grace period of two years) A subsidiary of MUST own >40% stake in its subsidiaries (>20% for listed subsidiaries) a non-financial HoldCo NOT allowed to own any stake in other affiliates but its direct subsidiaries A grandson subsidiary MUST own the entire 100% stake in its subsidiaries of a non- financial HoldCo NOT allowed to own any stake in other affiliates but its direct subsidiaries A non-bank MUST maintain gross gearing of <200% financial HoldCo MUST own >50% stake in subsidiaries (>30% for listed subsidiaries) NOT allowed to own >5% stake in non-financial companies NOT allowed to own >5% stake in non-affiliated companies A subsidiary of MUST own >50% stake in their own subsidiaries (>30% for listed subsidiaries) financial HoldCos NOT allowed to be a controlling shareholder in a non-financial company A grandson subsidiary of financial NOT allowed to be a controlling shareholder in a non-financial company HoldCos An insurance company NOT allowed to invest >7% of its total asset into equity/bonds issued by a single company NOT allowed to own >15% stake in non-subsidiaries NOT allowed to be a controlling shareholder in a non-financial company What is not allowed for Cross stake holding structure between the affiliates affiliates… Incremental circular stake holding structure among affiliates other than the existing ownerships A Chaebol financial/ insurance company cannot exercise its voting rights for its stakes in their affiliates

Source: Korea Ministry of Government Legislation, Credit Suisse

Figure 32: Samsung Group—Implication from the potential enhancement of the governance structure- related regulations, which are proposed in the National Assembly currently Proposed bills in the National Does Samsung Group's current Does any of process within CS' Does Samsung Group's final Remarks Assembly structure breach the regulation? reshuffling scenario breach the structure under CS' reshuffling regulation or is affected by the scenario breach the regulation? regulation? Current After the Current After the Current After the enhancement enhancement enhancement Enhancement of restriction on No Yes No No No No CS’s 5+3+2 step scenario clears circular ownership current circular ownership Restriction of voting right of No No No Yes No Yes SEC HoldCo may not have HoldCo's stakes in OpCo from enough stake for control in SEC treasury shares, in case of a OpCo if this bill is implemented HoldCo/OpCo split-up Enhancement of insurance No Yes No No No No CS scenario clears a potential companies' investment limit in breach even if the bill is affiliates out of their total assets implemented Enhancement of restrictions on No No Yes Yes No No CS’s 5+3+2 step scenario would holding companies satisfy most conditions even if the bill is implemented Enhancement of restrictions on Yes Yes No No Yes Yes Samsung C&T's revenues to inter-affiliates transaction by an other Samsung Group affiliates affiliate, in which the controlling can be affected if the bill is family has sizable direct ownership implemented Enhancement of restrictions on No Yes No No No Yes Samsung's several foundations public foundations' voting rights for own small stakes in C&T, their stakes in affiliated companies Electronics, Life, F&M, etc. Note: it is uncertain at current stage how many of the proposed bills here would be approved and implemented. Source: National Assembly, Credit Suisse estimates

Korea Market Strategy 22 2 February 2017

Figure 33: Korea—Special Act for Corporate Restructuring Promotion (often called One Shot Law) Regulation Content Expansion of range of small scale merger, If number of total new share issuance for a merger plan is <10% of the acquirer's current total outstanding shares, the merger is which does not require approval by the considered as a ‘Small scale merger’ under current regulation. The One Shot Law expands range of the small scale merger cap to acquirer's shareholders 20% from 10% temporarily until August 2018, which would enable lots of merger plans without approval by the acquirer's shareholders and without put pack option offering to the dissenting shareholders. Easing of put back option regulation for Reduction of the dissenting shareholders’ put back exercise period against a merger plan from current 20 days to 10 days dissenting shareholders in merger process Extension of the dissenting put back purchase period from current one month to three months Easing of restrictions on holding Lift of maximum gross gearing cap of 200% for HoldCos companies1 Lift of minimum stake ownership of 40% in their subsidiaries (20% for the listed subsidiaries) Lift of ban on >5% stake ownership in non-affiliates Easing of restrictions on subsidiaries of Lift of minimum stake ownership of 40% in their subsidiaries (20% for the listed subsidiaries) holding companies1 Lift of ban on any stake ownership in other affiliated companies but their own direct subsidiaries Easing of restrictions on grandson Relaxation of the grandson subsidiaries’ minimum stake ownership in affiliated companies from 100% to 50% subsidiaries of holding companies1 Note: The One Shot Law was implemented on 13 August 2016 and temporarily effective for the following three years. 1: The grace period is 1-2 years currently if a holding company or its subsidiaries are not satisfying the restrictions. Source: Korea Ministry of Government Legislation, Credit Suisse

Figure 34: Samsung Group—shareholding structure of the major affiliates (Current)

Lee family

17.1% 4.9% 31.1% 1.5% 20.8% Samsung C&T 2.6% (13.8%)

4.3% 0.1% 1.4% 19.3% 17.1% Samsung Samsung SDS Samsung Life Electronics 7.6% (0.1%) (10.2%) 22.6% (12.8%) 1.3% 43.4% 7.0% 3.4% 31.5% 22.8% 17.6% 15.0% 0.1%

SEMCO Samsung Heavy Samsung F&M Samsung Eng (2.7%) (11.3%) 0.2% (15.9%) 2.4%

2.1% 0.1% 71.9% 11.7%

19.6% Samsung SDI Samsung Card (1.3%) (2.3%)

Note: Figures in parenthesis are stakes in treasury. Based on share price on 23 Jan 2017 and a demerger ratio of 30 : 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Minor stake holdings or stakes in non-major affiliates are ignored. Source: Company data, Credit Suisse

Korea Market Strategy 23 2 February 2017

Figure 35: Samsung Group—ownership and financial structure of the major affiliates (Current) (23 Jan 2017) C&T SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng Basic info

# of shares (mn) 189.7 140.7 200.0 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 120,500 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 22,858 267,713 22,400 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 31.1 4.9 20.8 17.0 1.5 C&T 4.2 19.3 17.1 43.4 0.1 7.0 SEC 22.6 19.6 23.7 31.5 17.6 Life 0.0 7.6 15.0 71.9 3.4 0.0 F&M 1.4 1.3 0.2 SDI 2.1 0.4 11.7 SEMCO 2.6 2.4 Other related parties 2.0 0.1 6.9 3.4 0.8 0.1 Aggregated 39.3 18.1 47.0 18.4 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 13.8 12.8 10.2 15.9 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 53.1 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5 MV of the Samsung's stakes (W bn) Lee family 7,111 13,148 4,664 0 0 1,738 0 0 0 0 35 C&T 0 11,373 4,333 0 0 1,744 0 0 4,469 3 159 SEC 0 0 0 0 0 2,306 1,434 959 3,240 423 0 Life 0 20,215 0 1,942 3,226 0 0 0 0 81 1 F&M 315 3,533 0 0 0 0 0 0 0 0 5 SDI 487 0 0 0 0 0 0 0 0 10 266 SEMCO 603 0 0 0 0 0 0 0 0 57 0 Other related parties 461 242 1,537 444 0 0 61 0 0 3 0 Aggregated 8,977 48,511 10,533 2,385 3,226 5,788 1,495 959 7,710 578 465 Treasury 3,160 34,220 2,288 2,064 103 4 4 108 0 270 0 Samsung+T shares 12,138 82,731 12,821 4,449 3,329 5,792 1,498 1,067 7,710 848 465 Consolidated (W bn) Total asset 40,359 244,471 262,116 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 22,252 64,935 231,209 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 18,107 179,536 30,908 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 4,563 -69,165 -2,178 7 969 657 5,142 1,096 Gross gearing (%) 123% 36% 748% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn, Sep 2016) Total asset 33,009 165,002 226,244 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 16,320 33,095 203,378 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 16,689 131,907 22,866 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 3,512 -25,789 -1,388 288 -432 657 4,306 590 Gross gearing (%) 98% 25% 889% 467% 203% 18% 31% 32% 115% 218% 340% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Company data, Credit Suisse

Korea Market Strategy 24 2 February 2017

Figure 36: Samsung Group—major reshuffling events since 2013

Date Acquirer/ Issuer Target company Events CS view about the background Sep. 13 Cheil Ind (Everland) Former-Cheil Ind Announced to take over former-Cheil Ind's fashion division by Dec 2013 (W1.0 tn) A governance event Oct. 13 Samsung SDS Samsung SNS Announced merger with Samsung SNS by Dec 2013 To increase JY Lee's ownership in SDS Nov. 13 S1 Corp Cheil Ind (Everland) Announced to take over Everland's building mgt business by Jan 2014 (at W0.5 tn) A governance event Nov. 13 Cheil Ind (Everland) Samsung Welstory Announced a spin-off of its food catering division by Dec 2013 (Samsung An operational decision Welstory) Dec. 13 Samsung C&T Samsung Eng Acquired the stake of Samsung Eng (0% → 7.8%) from Samsung SDI and others A pre-step for clearance of the circular ownership structure Dec. 13 Samsung Life Samsung Card Acquired the stake of Samsung Card (28% → 34%) from Samsung C&T and Integration of financial affiliates others of Samsung Group under Life Mar. 14 Samsung SDI Former-Cheil Ind Announced a merger with former-Cheil Ind by Jul 2014 A pre-step for clearance of the (SDI issued new shares by 51% of its old shares) circular ownership structure Mar. 14 Samsung C&T / Cheil Lake Side Golf Announced a joint acquisition of Seoul Lake Side Golf Club at W350 bn (80:20) An operational decision Ind Club May. 14 Samsung SDS n.a Announced to go public by end-2014 To minimise potential reputational risk May. 14 Chairman Lee n.a Took emergency surgery due to a heart attack May. 14 Samsung Life Samsung Asset Announced to fully acquire (5.5% → 100%) Samsung Asset from Sec and others Integration of financial affiliates of Samsung Group under Life May. 14 Samsung Securities Samsung Futures Announced to fully acquire Samsung Futures Integration of financial affiliates of Samsung Group under Life Jun. 14 Cheil Ind n.a Announced to go public by end-2014 To minimise potential reputational risk Sep. 14 Samsung Heavy1 Samsung Eng1 Announced merger with Samsung Eng by Dec 2014* (Samsung Heavy was to An operational decision issue new shares by 41% of its old shares) Nov. 14 SEC/ C&T and others 2 Samsung Samsung Group has agreed to sell its 32.4% stake in Samsung Techwin at W842 An operational decision Techwin/Samsung bn and 57.6% stake (including Lee family's 6.1% stake) in Samsung General General Chemical2 Chemical at W1,060 bn to Hanwha Group. Nov. 14 SEC n.a SEC first share buyback since 2007 - buying back 1.65mn common shares (1.1% of total) and 250K preferred shares (1.1% of total); total amount W2.2 tn Dec. 14 SEC n.a Announced increase of DPS for FY2014 by 30-50% YoY May. 15 Cheil Ind (Everland) Samsung C&T Announced merger between Cheil Ind and Samsung C&T by Sep 2015 To enhance Lee family's control on C&T's 4.0% stakes in SEC Jun. 15 SEC SDS SEC officially denied any merger plan with SDS Aug. 15 SDI, Fine Chemical SDI, Fine Chemical SDI announced acquisition of Samsung Fine Chemical's battery business at W19 An operational decision bn and disposal of its 29% stakes in Samsung BP Chemical at W82 bn to Samsung Fine Chemical Oct. 15 Samsung Securities n.a Announced buyback of its own 2.45 mn shares (3.2% stake; no retirement), which A governance-related event would increase its t-shares from 5.5% to 8.7%. Oct. 15 Samsung F&M n.a Announced buyback of its own 1.66 mn shares (3.5% stake; no retirement), which A governance-related event would increase its t-shares from 12.4% to 15.9%. Oct. 15 SEC n.a SEC announced its first ever active shareholder return policy; (1) Spending A governance-related event W11.3 tn in total for share buyback/cancellation over the following 9-12 months (no cancellation for existing t-shares), (2) Returning 30-50% of FCF over 2015-17 back to its shareholders via dividend and share buyback/cancellation, and (3) Introducing quarterly dividend payment system from 2016 Oct. 15 SEC SDS SEC again firmly denied any merger plan with SDS A governance-related decision Oct. 15 SDI, SEC, C&T and SDI' chemical Samsung Group has agreed to sell (1) 90% stakes of SDI's chemical division after An operational decision division, Samsung a spin-off, (2) its controlling 31.2% stake in Samsung Fine Chemical (owned by Fine Chemical and SDI, SEC, C&T and Shilla), which also owns 49.0% stake in Samsung BP Samsung BP Chemical, at c.W3.0 tn to Lotte Chemical. Chemical Dec. 15 JY Lee Samsung JY Lee announced to participate max W300 bn in Samsung Eng's new rights To help Samsung Eng's new Engineering offering plan for cash raise of W1.2 tn. JY Lee has zero direct stake in Samsung rights offering plan Eng. Jan. 16 Samsung Life Samsung Card Samsung Life announced acquisition of Samsung Electronics' 37.4% stakes in A pre-step for SEC's split-up into Samsung Card at W1.54 tn (W35,500/share for 43.4mn shares), which would a HoldCo and an OpCo, in our increase Samsung Life's stake in Samsung Card from 34.4% to 71.9%. Samsung view, given a non-financial Life also announced buyback of its own 3.0mn shares (1.5% stake; no retirement) HoldCo and its subsidiaries are on the same day, which would increase its t-shares from 5.46% to 6.96%. not allowed to own stakes in financial affiliates.

Korea Market Strategy 25 2 February 2017

Date Acquirer/ Issuer Target company Events CS view about the background Jan. 16 JY Lee SDS JY Lee disposed 2.05% stake in SDS at W382 bn (W240,500/share for 1.59mn A governance-related decision shares). Lee family's stakes in SDS has been reduced from 19.1% to 17.0% (JY's direct ownership in SDS has been decreased from 11.25% to 9.20%). Feb. 16 JY Lee, Samsung Samsung C&T Samsung SDI disposed 5.0mn shares (2.64%) in C&T at W765 bn (W153,000/ A governance-related decision Public Welfare share), which is to satisfy FTC’s due date of 1 March 2016 to resolve incremental Foundation circular holding structure within Samsung Group by the merger between Samsung C&T and Cheil Industries in Sep 2015. Out of the 5.0mn shares, JY Lee and Samsung Public Welfare Foundation acquired 1.3mn/ 2.0mn shares at W199 bn/ W306 bn, respectively. Feb. 16 JY Lee Samsung JY Lee acquired 3.0mn shares (1.54%) in Samsung ENG's treasury at W30 bn Engineering (W9,980/ share) Oct. 16 SEC SEC acquired 14.5mn shares (12.64%) in Cheil Worldwide from Samsung C&T at W268 bn (W18,400/ share) Nov. 16 Samsung Biologics Samsung Biologics IPO of Samsung Biologics Nov. 16 SEC SEC Confirmed (1) review of demerger plan of SEC, (2) pay back 50% of FCF in 2016-17 to shareholders (including dividend and share retirement), and (3) establishment of an efficient capital management policy. 1: The merger attempt had failed. 2: The disposal deal was completed in June 2015. Source: Company data, Credit Suisse

Korea Market Strategy 26 2 February 2017

Samsung Electronics’ HoldCo/OpCo split-up, an essential step, favours the minorities Samsung Group would Korea’s major Chaebol groups’ (including Samsung Group) ongoing reshuffling work of eventually evolve into a their ownership/ governance structure appears to have the following three key goals or dual-layer holding requirements, in our view. company structure after the split-up of (1) Clearance of the Group’s current circular ownership structure, Samsung Electronics (2) Enhancement of the controlling family's ownership/ control (the Lee family, in case of into a HoldCo and an Samsung Group) over the entire Group (particularly over Samsung Electronics, in case of OpCo Samsung Group), (3) Minimisation of net cash outflow (which are mainly tax) from the controlling families and/or their affiliates. After checking through the feasibility of multiple possible scenarios, we believe that Samsung Group would eventually evolve into a dual-layer holding company structure after the split-up of Samsung Electronics (SEC) into a HoldCo and an OpCo, which Samsung Electronics admits could be under consideration. Within the structure, Samsung C&T would be at the top while Samsung Electronics Holdings would be at the second spot under Samsung C&T. We think that the dual-layer holding company structure is the optimal way at least in the near term to achieve the three key goals/ requirements of the Group’s ongoing reshuffling process with minimised financial burden and reputational risk for the family/Group. A split-up of Samsung We believe that a split-up of Samsung Electronics into a HoldCo and an OpCo is the most Electronics into a likely next major event given the other major steps require the split-up first, while there still HoldCo and an OpCo are several other steps remaining for completion in the dual-layer holding company appears the most likely structure. In case of a split-up of SEC, we estimate a demerger ratio of 30:70 between next major event SEC HoldCo and SEC OpCo. This implies current 100 shares in SEC would be converted into 30 shares of SEC HoldCo and 70 shares of SEC OpCo after the demerger assuming the HoldCo would have SEC's current 12.8% stake in treasury, its stakes in other Samsung Group affiliates and net cash of W20 tn out of SEC's current total consolidated net cash of W73 tn and the OpCo would keep SEC's current entire global operations and all other assets/liabilities. While the split-up plan requires approval by Samsung Electronics’ shareholders, we see no major barriers to shareholder approval given the split-up implies unlocking of underappreciated value in its investment asset and helps increase the value of minority shareholders in the company. After completion of the essential five steps within our reshuffling scenario for Samsung Group, the Lee family would eventually have 37% stake in Samsung C&T, which would mean a net cash outflow of W1.4 tn to the family. And the family would eventually control the entire Samsung Group, including SEC HoldCo, SEC OpCo and Samsung Life through Samsung C&T. Samsung Life also Meanwhile, given the active changes in shareholding structure of Samsung Fire & Marine appears to be and Samsung Card over the past 12 months, Samsung Life appears to be preparing for a preparing for a split-up transition into a financial HoldCo, meaning a split-up of Samsung Life into a financial into a financial HoldCo HoldCo and a non-life insurance company, which does not seem a mandatory step under and a non-life the current regulation though. In this case, after the split-up of Samsung Life, we expect (1) insurance company a split-up of Samsung C&T into an OpCo (with stakes in SEC HoldCo and Samsung Biologics) and a financial HoldCo (with stakes in Samsung Life), and (2) a merger between C&T financial HoldCo and Life financial HoldCo to follow. This means, the integrated financial HoldCo would have controlling stake in every financial affiliate of Samsung Group.

Korea Market Strategy 27 2 February 2017

Figure 37: Samsung Group— shareholding structure of the major affiliates (E, Interim-final, after completion of the essential five steps)

Lee family

16.1% 37.3% 20.8%

Samsung C&T (12.3%)

14.4% 19.3% 43.4%

31.5% Samsung Samsung Life SEC HoldCo Biologics 6.7% (10.2%)

1.2%

30.8% 19.6% 23.7% 23.9% 18.9% 56.7% 30.9% 71.9% Samsung Samsung Samsung Samsung SEC OpCo SDI SEMCO Heavy Eng SDS Samsung F&M Samsung Card (1.3%) (6.1%) (1.5%) (0.1%) (15.9%) (0.4%)

Note: Figures in parenthesis are stakes in treasury. Based on share price on 23 Jan 2017 and a demerger ratio of 30 : 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Minor stake holdings or stakes in non-major affiliates are ignored. Source: Credit Suisse estimates

Figure 38: Samsung Group— shareholding structure of the major affiliates (E, Final, after completion of the essential five steps and the optional three steps)

Lee family

16.1% 37.3% 23.9%

Samsung C&T (13.8%)

43.4% 14.4%

31.5% Samsung Financial SEC HoldCo Holdco (26.5%) Biologics 20.8%

29.6% 1.2%

30.9% 71.9%

30.8% 19.6% 23.7% 23.9% 18.9% 56.7% 6.7% Samsung Samsung Samsung Samsung Life Samsung F&M Samsung Card SEMCO Samsung SEC OpCo SDI Heavy SDS (10.2%) (15.9%) (2.3%) (2.7%) Eng (1.3%) (11.3%) (0.1%)

Note: Figures in parenthesis are stakes in treasury. Based on share price on 23 Jan 2017 and a demerger ratio of 30 : 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Minor stake holdings or stakes in non-major affiliates are ignored. Source: Credit Suisse estimates

Korea Market Strategy 28 2 February 2017

Figure 39: Samsung Group—ownership and financial structure of the major affiliates (E, Interim-final, after completion of the essential five steps) (23 Jan 2017) C&T SEC SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng HoldCo OpCo Basic info (common only) # of shares (mn) 189.7 48.5 97.6 200.0 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 120,500 1,903,000 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 22,858 92,228 185,642 22,400 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 37.3 16.1 20.8 1.5 C&T 14.4 19.3 43.4 SEC HoldCo 30.8 56.7 19.6 23.7 31.5 23.9 18.9 SEC OpCo Life 6.7 30.9 71.9 F&M 1.2 SDI SEMCO Other related parties 2.0 0.1 0.1 6.9 3.4 0.8 0.1 Aggregated 39.3 38.5 30.9 47.0 34.3 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 13.8 10.2 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 53.1 38.5 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5

MV of the Samsung's stakes (W bn) Lee family 8,516 14,885 4,664 35 C&T 13,279 4,333 4,469 SEC HoldCo 57,200 5,788 1,434 959 3,240 575 430 SEC OpCo Life 6,197 4,006 3,226 F&M 1,083 SDI SEMCO Other related parties 461 74 168 1,537 444 61 3 Aggregated 8,977 35,519 57,368 10,533 4,449 3,226 5,788 1,495 959 7,710 578 465 Treasury 3,160 2,288 103 4 4 108 0 270 Samsung+T shares 12,138 35,519 57,368 12,821 4,449 3,329 5,792 1,498 1,067 7,710 848 465

Consolidated (W bn) Total asset 40,359 84,276 180,843 262,116 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 22,252 64,935 231,209 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 18,107 84,276 115,908 30,908 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 4,563 -3,113 -49,165 -7,929 -4,116 -2,178 -728 504 657 5,142 1,096 Gross gearing (%) 123% 56% 748% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn) Total asset 33,009 84,276 101,373 226,244 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 16,320 33,095 203,378 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 16,689 84,276 68,278 22,866 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 3,512 -3,113 -5,789 -7,929 -4,116 -1,388 -446 -897 657 4,306 590 Gross gearing (%) 98% 48% 889% 467% 203% 18% 31% 32% 115% 218% 340%

Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates.

Korea Market Strategy 29 2 February 2017

Figure 40: Samsung Group—ownership and financial structure of the major affiliates (E, Final, After completion of the essential five steps and the optional three steps) (23 Jan 2017) C&T SEC Financial SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng HoldCo HoldCo OpCo Basic info (common only) # of shares (mn) 167.0 48.5 120.0 97.6 95.3 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 120,500 1,903,000 120,500 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 20,123 92,228 14,456 185,642 10,679 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 37.3 16.1 23.9 20.8 1.5 C&T 14.4 43.4 Financial HoldCo 29.6 30.9 71.9 SEC HoldCo 30.8 56.7 19.6 23.7 31.5 23.9 18.9 SEC OpCo Life 6.7 F&M 1.2 SDI SEMCO Other related parties 2.0 0.1 5.9 0.1 6.9 3.4 0.8 0.1 Aggregated 39.3 38.5 29.9 30.9 57.2 34.3 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 13.8 26.6 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 53.1 38.5 56.5 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5 MV of the Samsung's stakes (W bn)

Lee family 7,497 14,885 3,459 2,223 35 C&T 13,279 4,469 Financial HoldCo 3,156 4,006 3,226 SEC HoldCo 57,200 5,788 1,434 959 3,240 575 430 SEC OpCo Life 6,197 F&M 1,083 SDI SEMCO Other related parties 406 74 859 168 733 444 61 3 Aggregated 7,903 35,519 4,319 57,368 6,112 4,449 3,226 5,788 1,495 959 7,710 578 465 Treasury 2,782 3,843 103 4 4 108 0 270 Samsung+T shares 10,685 35,519 8,161 57,368 6,112 4,449 3,329 5,792 1,498 1,067 7,710 848 465 Consolidated (W bn) Total asset 36,026 84,276 14,585 180,843 249,597 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 20,086 10,513 64,935 222,862 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 15,940 84,276 4,072 115,908 26,735 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 4,563 -3,113 -2,379 -49,165 -5,550 -4,116 -2,178 -728 504 657 5,142 1,096 Gross gearing (%) 126% 258% 56% 834% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn) Total asset 28,676 84,276 14,585 101,373 213,724 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 14,153 0 10,513 33,095 195,032 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 14,522 84,276 4,072 68,278 18,693 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 3,512 -3,113 -2,379 -5,789 -5,550 -4,116 0 -1,388 -446 -897 657 4,306 590 Gross gearing (%) 97% 0% 258% 48% 1043% 467% 203% 18% 31% 32% 115% 218% 340% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Korea Market Strategy 30 2 February 2017

Lee family's friendly stake in SEC HoldCo could rise from 18% to as high as 39% through two share swaps without any cash outflow Lee family and Out of the several possible options, we believe that a share swap of the controlling Lee Samsung C&T will family's 4.9%/17.0% stakes in SEC OpCo/Samsung SDS (worth W10.9 tn in aggregate likely attempt share currently; based on current share prices of SEC/SDS and our demerger ratio estimate) swaps with their stakes into shares of SEC HoldCo after the split-up of SEC is the most feasible way to increase in SEC OpCo/SDS into Lee family's direct ownership in SEC HoldCo with minimised cash cost burden (i.e., zero shares of SEC HoldCo, tax incurred effectively). in our view After completion of the first share swap, we expect Samsung C&T to attempt another share swap with its stakes in non-financial Samsung Group affiliates (including its 4.2% stake in SEC OpCo and 17.1% stake in SDS) into shares of SEC HoldCo. Of note, the two share swap plans are unlikely to require any approval from SEC HoldCo’s shareholders as SEC HoldCo’s new share issuance for the plans is unlikely to be higher than 20% of the HoldCo’s total outstanding shares if it utilises its 12.8% stake of its own under its treasury for the share swap plans, implying a minimised execution risk. All-in-all, we estimate that the Lee family/Samsung Group could increase their aggregated stake in SEC HoldCo from 18% right after the demerger of SEC into a HoldCo and an OpCo to about 39% through two share swaps without any cash injection and any cash outflow, based on current share prices of the related stocks and our demerger ratio estimate.

Figure 41: SEC HoldCo—changes in ownership by two share swaps (Step 3 and step 4 under Credit Suisse’s reshuffling scenario) After Step 2 After Step 3 After Step 4 (W tn) Mkt value1 Stake (%) Mkt value1 Stake (%) Mkt value1 Stake (%) Lee family 4.0 4.9 14.9 18.1 14.9 16.1 Samsung C&T 3.5 4.2 3.5 4.2 13.3 14.4 Other Samsung Group affiliates 7.4 9.0 7.4 8.9 7.4 8.0 Treasury 10.5 12.8 0.0 0.0 0.0 0.0 Minorities 56.7 69.1 56.7 68.8 56.7 61.5 Total 82.1 100.0 82.4 100 92.2 100.0

1: Based on closing price on 23 Jan 2017 and a demerger ratio of 30:70 between SEC HoldCo and SEC OpCo. Source: Credit Suisse estimates

Figure 42: Korea—series of sunset extensions for income tax deferral favour for share swap with holding companies

Until Dec 2003 Until Dec 2006 Until Dec 2009 Until Dec 2012 Until Dec 2015 Until Dec 2018 (initially introduced in (extended in 2003) (extended in 2006) (extended in 2009) (extended in 2012) (extended in 2015) 2000)

Note: Deferral of a company/individual's income tax payment is allowed until the disposal of the newly acquired stake in a holding company if it swaps its stakes in subsidiaries of a holdco with shares of the holding company before end-2018. Source: Korea Ministry of Government Legislation, Credit Suisse

Korea Market Strategy 31 2 February 2017

Figure 43: Samsung Group—changes in shareholding structure of the major affiliates under Credit Suisse’s reshuffling scenario (%) Stakes owned by Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Samsung C&T Lee family 31.1 31.1 31.1 31.1 31.1 37.3 37.3 37.3 37.3 Other related parties 8.2 8.2 8.2 8.2 8.2 2.0 2.0 2.0 2.0 Aggregated 39.3 39.3 39.3 39.3 39.3 39.3 39.3 39.3 39.3 T-shares 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 Aggregated + t-shares 53.1 53.1 53.1 53.1 53.1 53.1 53.1 53.1 53.1 C&T Financial HoldCo Lee family 37.3 23.9 Other related parties 2.0 5.9 Aggregated 39.3 29.9 T-shares 13.8 26.6 Aggregated + t-shares 53.1 56.5 SEC (SEC OpCo) Lee family 4.9 4.9 4.9 C&T 4.2 4.2 4.2 4.2 SEC HoldCo 12.8 21.7 26.6 30.8 30.8 30.8 30.8 30.8 Life 7.6 7.6 Other related parties 1.4 1.4 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Aggregated 18.1 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 T-shares 12.8 Aggregated + t-shares 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 SEC HoldCo Lee family 4.9 4.9 18.1 16.1 16.1 16.1 16.1 16.1 C&T 4.2 4.2 4.2 14.4 14.4 14.4 14.4 14.4 Life 7.6 7.6 7.5 6.7 6.7 6.7 6.7 6.7 Other related parties 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 Aggregated 18.1 18.1 31.2 38.5 38.5 38.5 38.5 38.5 T-shares 12.8 12.8 0.0 Aggregated + t-shares 30.9 30.9 31.2 38.5 38.5 38.5 38.5 38.5 Life (Life OpCo) Lee family 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 C&T 19.3 19.3 19.3 19.3 19.3 19.3 19.3 C&T financial HoldCo 19.3 29.6 Life HoldCo 10.2 10.2 Other related parties 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 Aggregated 47.0 47.0 47.0 47.0 47.0 47.0 57.2 57.2 57.2 T-shares 10.2 10.2 10.2 10.2 10.2 10.2 Aggregated + t-shares 57.2 57.2 57.2 57.2 57.2 57.2 57.2 57.2 57.2 Life HoldCo Lee family 20.8 20.8 C&T 19.3 C&T financial HoldCo 19.3 Other related parties 6.9 6.9 Aggregated 47.0 47.0 T-shares 10.2 10.2 Aggregated + t-shares 57.2 57.2 Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Korea Market Strategy 32 2 February 2017

Figure 44: Samsung Group—changes in shareholding structure of the major affiliates under Credit Suisse’s reshuffling scenario (%) Stakes in Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Lee family C&T 31.1 31.1 31.1 31.1 31.1 37.3 37.3 37.3 37.3 C&T Financial HoldCo 37.3 23.9 SEC 4.9 SEC HoldCo 4.9 4.9 18.1 16.1 16.1 16.1 16.1 16.1 SEC OpCo 4.9 4.9 Life 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 Life HoldCo 20.8 20.8 SDS 17.0 17.0 17.0 Samsung C&T SEC 4.2 SEC HoldCo 4.2 4.2 4.2 14.4 14.4 14.4 14.4 14.4 SEC OpCo 4.2 4.2 4.2 Life 19.3 19.3 19.3 19.3 19.3 19.3 19.3 Life HoldCo 19.3 SDS 17.1 17.1 17.1 17.1 Biologics 43.4 43.4 43.4 43.4 43.4 43.4 43.4 43.4 43.4 Treasury 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 C&T Financial HoldCo Life 19.3 29.6 Life HoldCo 19.3 F&M 30.9 Card 71.9 Treasury 13.8 26.6 SEC (SEC OpCo) SDS 22.6 SDI 19.6 SEMCO 23.7 Heavy 17.6 Treasury 12.8 SEC HoldCo SEC OpCo 12.8 21.7 26.6 30.8 30.8 30.8 30.8 30.8 SDS 22.6 22.6 39.6 56.7 56.7 56.7 56.7 56.7 SDI 19.6 19.6 19.6 19.6 19.6 19.6 19.6 19.6 SEMCO 23.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7 Heavy 17.6 23.8 23.8 23.9 23.9 23.9 23.9 23.9 Treasury 12.8 12.8 0.0 0.0 0.0 0.0 0.0 0.0 Life (Life OpCo) SEC 7.6 SEC HoldCo 7.6 7.6 7.5 6.7 6.7 6.7 6.7 6.7 SEC OpCo 7.6 0.0 Non-Financial HoldCo F&M 15.0 15.0 30.9 30.9 30.9 30.9 Card 71.9 71.9 71.9 71.9 71.9 71.9 Treasury 10.2 10.2 10.2 10.2 10.2 10.2 Life HoldCo Life 10.2 10.2 F&M 30.9 30.9 Card 71.9 71.9 Treasury 10.2 10.2 Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Korea Market Strategy 33 2 February 2017

Figure 45: Samsung Group—cash flow of the major affiliates under Credit Suisse’s reshuffling scenario (W bn) Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Total Lee family Inflow 0 Outflow 1,405 1,405 Net CF -1,405 -1,405 SEC HoldCo Inflow 0 Outflow 16,887 16,887 Net CF -16,887 -16,887 Life Inflow 14,100 0 14,100 Outflow 6,172 0 6,172 Net CF 7,928 0 7,929 F&M Inflow 4,519 315 4,834 Outflow 718 0 718 Net CF 3,800 315 4,116 SDI Inflow 276 487 763 Outflow 0 29 29 Net CF 276 459 735 SEMCO Inflow 57 603 660 Outflow 17 178 195 Net CF 40 425 465 Aggregated Inflow 18,952 1,405 20,357 Outflow 23,794 1,612 25,406 Net CF -4,842 -206 -5,048 Note: The total net cash outflow of W5.0 tn (E) to the outside of Lee family/Samsung Group is purely income tax on capital gains from disposal of their stakes in other Samsung Group affiliates within the reshuffling process. Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Figure 46: Samsung Group—income tax on capital gains from disposal of stakes in other Samsung Group affiliates under Credit Suisse’s reshuffling scenario (W bn) Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Total Samsung Life 4,108 0 4,108 Samsung F&M 718 0 718 Samsung SDI 0 29 29 SEMCO 17 178 195 Total 4,843 206 5,049

Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Korea Market Strategy 34 2 February 2017

A merger between SEC (or SEC HoldCo) and SDS unlikely given a bigger side-effect than a tiny benefit Increase in the A merger between SEC and SDS is highly unlikely as SEC has already officially denied. controlling family’s While minority shareholders of SEC would be barely supportive of the merger plan given friendly stake in SEC SDS' higher valuation over that of SEC, the merger could increase the family/Group's by a merger between stake in SEC only marginally, implying a bigger reputational risk for the controlling family SEC and SDS is very versus the marginal benefit by the merger. marginal Figure 47: Samsung Electronics—changes in shareholding structure by merger with Samsung SDS SEC SDS SEC + SDS (W bn) Mkt value Stake Mkt value Stake Mkt value Stake Lee family 13.1 4.9% 1.7 17.0% 14.6 5.4% Samsung Group affiliates 35.4 13.2% 4.1 39.7% 37.1 13.4% Treasury 34.2 12.8% 0.0 0.0% 36.5 13.1% Minorities 185.0 69.1% 4.4 43.3% 189.4 68.1% Total 267.7 100.0% 10.2 100.0% 277.9 100.0% Note: Based on share price on 23 Jan 2017. Source: Company data, Credit Suisse estimates

From the same standpoint, we believe a merger between SEC HoldCo (after the split-up of SEC into a HoldCo and an OpCo) and SDS is also unlikely, given the limited increase in the family/Group's stake in SEC HoldCo by the merger versus a bigger reputational risk. Further, SEC HoldCo shareholders are unlikely to approve the merger plan considering SDS’ higher valuation over that of SEC, while the merger plan would require the approval from shareholders of both SEC HoldCo and SDS.

Figure 48: Samsung Electronics—changes in shareholding structure by merger with Samsung SDS SEC HoldCo1 SDS SEC HoldCo1 + SDS (W bn) Mkt value Stake Mkt value Stake Mkt value Stake Lee family 4.0 4.9% 1.7 17.0% 5.8 6.3% Samsung Group affiliates 10.8 13.2% 4.1 39.7% 12.6 13.6% Treasury 10.5 12.8% 0.0 0.0% 12.8 13.9% Minorities 56.7 69.1% 4.4 43.3% 61.1 66.2% Total 82.1 100.0% 10.2 100.0% 92.3 100.0% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Source: Company data, Credit Suisse estimates

Korea Market Strategy 35 2 February 2017

A merger between C&T and SEC HoldCo offers an optimal structure but not a must process A merger between A merger between Samsung C&T and SEC HoldCo (after the split-up of SEC) would make Samsung C&T and SEC overall ownership/governance structure into an optimal straightforward one. HoldCo (after the split- up of SEC) would make Nonetheless, the final merger between C&T and SEC HoldCo for the optimal structure is an optimal ownership unlikely at least in the near term. While the merger would drastically reduce the Lee structure but family’s stake in C&T from 37% (E) to 20% (E), we fail to find any obvious benefit other substantially reduce than the optimal shape itself, which does not appear convincing enough to offset the the controlling family’s family’s disadvantage by the sizable decrease of its stake in C&T. stake in C&T It is also uncertain whether the merger plan can be approved by shareholders of SEC HoldCo. Of note, more than half of the entire shares should vote and more than two-thirds of attending shares should approve it for the final approval of a merger plan. Finally, we expect the Lee family may also try a share swap of its 20.8% stake in Life OpCo into shares of Financial HoldCo, so that it could increase its stake in the financial HoldCo from 24% to 44%.

Figure 49: Samsung Group—the additional two steps in the long term for an optimal governance structure (E, After completion of the essential five steps and the optional three steps under CS’s reshuffling scenario) Steps Process Optimal 1 A merger between C&T OpCo and SEC HoldCo Optimal 2 Share swap of Lee family's 20.8% stake in Life OpCo into shares of the Financial HoldCo

Source: Credit Suisse estimates

Figure 50: Samsung Group—the optimal shareholding structure in the long term (Final, after completion of the essential five steps + the optional three steps + the optimal two steps under CS’ reshuffling scenario)

Lee family

19.9% 44.3%

Samsung C&T Financial (14.3%) Holdco

50.4% 1.0%

30.9% 71.9%

30.8% 19.6% 23.7% 23.9% 18.9% 56.7% 74.9% 5.5% Samsung Samsung Samsung Samsung Card SEMCO Samsung Samsung Samsung Life SEC SDI Heavy SDS Samsung F&M (2.7%) Eng Biologics (2.3%) (0.1%) (11.3%) (0.1%)

Note: Figures in parenthesis are stakes in treasury. Based on share price on 23 Jan 2017 and a demerger ratio of 30 : 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Minor stake holdings or stakes in non-major affiliates are ignored. Source: Company data, Credit Suisse estimates

Korea Market Strategy 36 2 February 2017

Figure 51: Major Samsung Group affiliates—ownership and financial structure (E, optimal, after completion of the essential five steps + the optional three steps + the optimal two steps under CS’ reshuffling scenario) (23 Jan 2017) C&T Financial SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng HoldCo Basic info # of shares (mn) 59.0 106.5 97.6 95.3 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 1,903,000 120,500 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 112,351 12,837 185,642 10,679 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 19.9 44.3 1.5 C&T 30.8 56.7 19.6 23.7 74.9 23.9 18.9 Financial HoldCo 50.4 30.9 71.9 SEC Life 5.5 F&M 1.0 SDI SEMCO Other related parties 0.4 6.7 0.1 6.9 3.4 0.8 0.1 Aggregated 26.8 51.0 30.9 57.2 34.3 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 14.3 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 41.1 51.0 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5 MV of the Samsung's stakes (W bn) Lee family 22,383 5,683 35 C&T 57,200 5,788 1,434 959 7,710 575 430 Financial HoldCo 5,380 4,006 3,226 SEC Life 6,197 F&M 1,083 SDI SEMCO Other related parties 480 859 168 733 444 61 3 Aggregated 30,143 6,542 57,368 6,112 4,449 3,226 5,788 1,495 959 7,710 578 465 Treasury 16,061 103 4 4 108 0 270 Samsung+T shares 46,204 6,542 57,368 6,112 4,449 3,329 5,792 1,498 1,067 7,710 848 465 Consolidated (W bn) Total asset 107,023 12,966 180,843 249,597 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 20,086 10,513 64,935 222,862 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 86,937 2,453 115,908 26,735 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 1,450 -2,379 -49,165 -5,550 -4,116 -2,178 -728 504 657 5,142 1,096 Gross gearing (%) 23% 429% 56% 834% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn) Total asset 99,672 12,966 101,373 213,724 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 14,153 10,513 33,095 195,032 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 85,519 2,453 68,278 18,693 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 399 -2,379 -5,789 -5,550 -4,116 -1,388 -446 -897 657 4,306 590 Gross gearing (%) 17% 429% 48% 1043% 467% 203% 18% 31% 32% 115% 218% 340% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Korea Market Strategy 37 2 February 2017

Hyundai Motor Group restructuring Regulations and peer pressure to lead Hyundai Motor Group (HMG) restructuring. Given (1) a number of new bills have been proposed by political parties under the justification of 'Economic Democratisation', (2) multiple conglomerates including Samsung, Lotte, and Hyundai Heavy have begun or announced group restructuring, and (3) a rising need for improved holding structures for better corporate governance by financial investors including activist funds, we think it is time to assess the realistic holding structure change scenarios for HMG to find opportunities and minimise risks. We provide three different scenario analyses for Hyundai Motor Group (HMG) and believe splitting three companies (HMC, Kia, and Mobis) into Holdco and Opco followed by three Holdco's merger would be the most suitable scenario for the group. As the group restructuring requires the Chung family's Glovis share swap to get the new Holdco shares, Glovis will eventually lose the owner's (Chung family) premium which is a negative for the stock. Focus chart

Figure 52: HMG—potential upside after the restructuring (W bn, %) HMC Kia Mobis Current market cap for HMC/Kia/Mobis 31,389 15,302 25,893 Target market cap for Holdco 24,351 9,290 11,137 Target market cap for Opco 38,080 14,145 25,616 Target market cap for HMC/Kia/Mobis 62,431 23,435 36,752 Upside (%) 99% 53% 42% Source: Company data, Credit Suisse estimates

Regulation changes, peer pressures to drive HMG's holding structure changes External factors to drive HMG holding structure changes. Hyundai Motor Group (HMG) is the second largest Korean conglomerate and has long been known for its complex circular holding structures. Yet, given (1) a number of new bills have been proposed by political parties under the justification of 'Economic Democratisation', (2) multiple conglomerates (including Samsung, Lotte, and Hyundai Heavy) have begun or announced group restructuring, and (3) a rising need for improved holding structures for better corporate governance by financial investors including activist funds, we think it is time to assess the realistic holding structure change scenarios for HMG to find opportunities and to minimise risks.

Korea Market Strategy 38 2 February 2017

Figure 53: Current holding structure, Hyundai Motors Group

Note: Dark blue line/numbers are for Hyundai Motor, Red line/numbers are for Kia Motor, Grey line/numbers are for Mobis; minor stakes, i.e. <1% are omitted. Source: Company data, Credit Suisse research

Figure 54: Current holding structure, Hyundai Motors Group—financial subsidiaries

Note: Hyundai Motors acquired 20% of Hyundai Capital stakes from GE capital in Oct-2016. Source: Company data, Credit Suisse research

Korea Market Strategy 39 2 February 2017

Figure 55: Hyundai Motors Group—ownership and financial structure of the major affiliates (Current) 005380.KS 000270.KS 012330.KS 086280.KS 004020.KS 000720.KS 011210.KS 214320.KS 26-Jan-17 Hyundai Kia Hyundai Hyundai Hyundai Hyundai Hyundai Innocean Aggregated Motor Motors Mobis" Glovis Steel E&C Wia Basic info # of shares (mn) 220.3 405.4 97.3 37.5 133.4 111.4 27.2 20.0 Share price (W) 142,500 37,750 266,000 163,500 59,300 40,500 69,300 61,100 Mkt cap (W bn) 31,389 15,302 25,893 6,131 7,913 4,510 1,885 1,222 94,246 Stake owned by (%) Chung family 7.45 1.74 6.96 30.00 11.81 1.95 2.00 MK Chung (Group chairman) 5.17 6.96 6.71 11.81 ES Chung (vice chairman) 2.28 1.74 23.29 1.95 2.00 HMC 33.88 4.88 6.87 20.95 25.35 Kia 16.88 17.27 5.24 13.44 Mobis 20.78 8.73 Glovis 0.67 Steel 5.66 Wia Innocean Other related parties 4.46 9.00 Aggregated 28.23 35.62 30.17 39.34 35.96 34.91 40.74 11.00 Treasury 6.00 1.09 2.75 1.89 2.33 HMG +T shares 34.24 36.71 32.92 39.34 37.85 34.91 43.07 11.00 MV of the HMG's stakes (W bn) Chung family 2,339 267 1,803 1,839 935 37 24 7,244 MK Chung (Group chairman) 1,624 0 1,803 412 935 4,773 ES Chung (vice chairman) 715 267 1,428 37 24 2,470 HMC 5,184 299 544 945 478 7,450 Kia 4,370 1,367 236 253 6,226 Mobis 6,524 394 6,918 Glovis 175 175 Steel 1,464 1,464 Wia Innocean Other related parties 273 110 383 Aggregated 8,863 5,450 7,812 2,412 2,845 1,575 768 134 29,859 Treasury 1,884 167 712 149 44 2,957 HMG+T shares 10,747 5,618 8,524 2,412 812 134 28,247 Consolidated (W bn, Sep 2016) Total asset 171,075 47,883 39,164 3,771 31,853 19,192 6,715 1,328 320,982 Liabilities 99,671 22,300 11,818 4,298 15,652 11,464 3,521 684 169,409 Equity 71,404 25,583 27,346 3,441 16,201 7,728 3,194 644 155,541 Net debt (Net cash) -14,300 -1,863 -4,796 644 10,273 1,243 486 -597 -8,910 Gross gearing (%) 140% 87% 43% 125% 97% 148% 110% 106% 109% Parent (W bn) Total asset 65,704 34,182 23,936 6,706 30,185 12,422 5,780 835 179,751 Liabilities -13,683 -12,206 -4,796 3,626 14,204 7,147 2,685 259 -2,763 Equity 52,021 21,976 19,576 3,080 15,981 5,275 3,095 576 121,580 Net debt (Net cash) -2,828 -919 -2,247 23 10,422 322 142 -416 4,499 Gross gearing (%) -26% -56% -24% 118% 89% 135% 87% 45% -2% Note: Priced as of 26 January 2017. Source: Datastream, company data, Credit Suisse estimates

Korea Market Strategy 40 2 February 2017

Regulations that could affect HMG structures

Figure 56: Korea—Regulation changes proposed Article Proposed Act Topic Proposed bill Congressman Party No. date  Companies subject to the legal restrictions on cross holdings (i.e., Fair Trading Article Cross 2-Sep- chaebols) are currently not permitted to create new cross Un Yeol Choi (24)* Democrats Act 9.3 ownership 2016 shareholding.  The proposed bill also forces chaebols to unwind existing cross shareholding.  According to the bill, there are currently 94 cross shareholdings by 8 chaebol groups. Fair Trading Article Intra-group  Intra-group transactions by chaebols constrain SMEs from the Dong Cheol, Kim People's 7-Jun- Act 23.2 revenue opportunity for fair competition. (10)* 2016 transactions  Current regulation on intra-group transaction is applicable to greater than 30% ownership (20% of unlisted companies) by affiliates. The family reduced its stake in Hyundai Glovis to 29.99%. Samsung SNS and Hyundai Amco were merged with Samsung SDS and Hyundai Engineering, respectively.  The amount of intra-group transaction is still W155 tn by the top 10 chaebols.  The ownership will be reduced to 10% from the current 30% and the stake will be inclusive of same person and/or the person's relative Commercial Article Non-standing BoD  It is difficult to achieve the independence of non-standing directors I Bae, Chae (14)* People's 11-Nov-2016 Act 542, member under the current law as the proportion of the BoD with interest in the Clause 8, company within large-sized corporates is considerable. 12  Management experience of more than five years at the listed company or BoD experience of six years in the company or nine years in affiliate companies constitutes disqualification as a member of the BoD.  Majority shareholders and their special related parties cannot be members of the BoD nomination committee.  Listed companies larger than a certain value have to guarantee a non-standing BoD member recommended by a shareholder with 3% or greater ownership for at least six months. Note: * The numbers in brackets denote the number of congressman who support the bill. Source: Various media (Maeil Economy, Chosunbiz), Ministry of Government Legislation, Credit Suisse research

1. Four circular holdings in HMG must be disconnected if the Fair Trading Act Article 9.3 is amended. The current regulation limits any crossholding companies from creating new cross shareholdings. Yet, the proposed bill forces them to unwind even the existing cross shareholding. HMG has the following four circular holdings and they must be disconnected if the proposed bill is passed.

■ HMC  Kia  Mobis  HMC

■ HMC  Kia  Hyundai Steel  Mobis

■ HMC  Glovis  Mobis  HMC

■ HMC  Hyundai Steel  Mobis  HMC

Korea Market Strategy 41 2 February 2017

Figure 57: Four circular holdings in Hyundai Motor Group 1) HMC - Kia - Mobis 2) HMC - Kia - Hyundai Steel - Mobis

(Won tr) Hyundai Mobis 33.88% 5.2 Hyundai Motor Kia Motor (Won tr) (Won tr) (Won tr) (Won tr) 20.78% 6.5 16.88% 4.4 6.87% 0.5 16.88% 4.4 (Won tr) (Won tr) (Won tr) 20.78% 6.5 17.27% 1.4 33.88% 5.2 Hyundai Motor Kia Motor (Won tr) 5.66% 1.5 Hyundai Mobis Hyundai Steel

3) HMC - Glovis - Mobis 4) HMC - Hyundai Steel - Mobis

Hyundai Mobis Hyundai Mobis (Won tr) (Won tr) (Won tr) (Won tr) 20.78% 6.5 0.67% 0.2 20.78% 6.5 5.66% 1.5

(Won tr) (Won tr) 4.88% 0.3 6.87% 0.5 Hyundai Motor Hyundai Glovis Hyundai Motor Hyundai Steel

Note: Dark blue line/numbers are for Hyundai Motor, Red line/numbers are for Kia Motor, Grey line/numbers are for Mobis; minor stakes, i.e. <1% are omitted. Source: Company data, Credit Suisse estimates

2. Chung family's Hyundai Glovis (Glovis) ownership must be lowered to below 20% if Fair Trading Act Article 23.2 is amended. Currently, intra-group transaction is applicable to greater than 30% ownership (20% for unlisted companies) by affiliates. To satisfy the regulation, HMG chairman MK Chung and ES Chung, a vice-chairman and the son of MK Chung, reduced their combined ownership of Hyundai Glovis to 29.99% in January 2015 from 43.39%. The proposed bill forces the Chung family's Glovis ownership to be reduced further to below 20.0%. This amendment is critical for the Chung family as: (1) ES Chung has the biggest stake (23.29%) in Glovis, and (2) the stock plunged 23% in two days when the Chung family lowered its ownership in January 2015.

Figure 58: Glovis shares plunged after Chung family Figure 59: The valuation also quickly derated post lowered its ownership to meet the regulation the Chung family's stake sale of Glovis in 1Q15

('000 KRW) Chung family lowered its (Index) (KRW) ownership in Jan 2015 25.0x 350 2400 350,000

300 2200 300,000

250 2000 250,000 17.0x

200 1800 200,000 13.0x

150 1600 150,000 10.0x 8.0x 100 1400 100,000

50 1200 50,000

0 1000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Hyundai Glovis share price (LHS) Kospi index (RHS)

Source: Company data, Credit Suisse estimates, Bloomberg Source: Company data, Credit Suisse estimates, Datastream

Korea Market Strategy 42 2 February 2017

3. Treasury shares cannot be used to increase ownership if Commercial Act 530.8 is amended. When a company splits into a holding company and an operating company, treasury shares are typically allotted to a holding company to increase the ownership of the operating entity. However, a bill has been proposed for a holding company not to own treasury shares to avoid Chaebol families from using treasury shares to meet the minimum 20% subsidiary ownership requirement. If the bill is passed, HMC's 6% treasury shares cannot be used for the holding company transition and the company must acquire this share in the market to meet the 20% subsidiary requirement. This would require W1.9 tn of additional cash.

Figure 60: Treasury shares may not be used to increase ownership of an operating entity 005380.KS 000270.KS 012330.KS 086280.KS 004020.KS 000720.KS 011210.KS 214320.KS Hyundai Kia Hyundai Hyundai Hyundai Hyundai Hyundai Innocean Aggregated Motor Motors Mobis Glovis Steel E&C Wia Treasury (%) 6.00 1.09 2.75 0.00 1.89 0.00 2.33 0.00 0.00 Treasury (W bn) 1,884 167 712 0 149 0 44 0 2,957 Source: Company data, Credit Suisse estimates

4. Capital gain tax deferral by 2018 when creating a holding company. The Special Taxation Act 38-2 allows a capital gains tax deferral on equity swap for making a holding company but this expires in end-2018. The Chung family can avoid the 22% capital gains tax if the equity swap for creating a holding company is made before 2019.

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Three restructuring scenarios for HMG As the regulatory amendments along with peer pressure could trigger the group's restructuring while the group chairman, MK Chung, still actively participates in the management of the group's operations, we assume that the realistic holding structure changes must meet the needs of minimum shareholding changes to meet the new regulation yet keep the control of MK Chung. In addition, while the market often expects HMG's holding structure change to be mainly focused on maximising the Chung family's controlling stakes within the group, we believe it is much more realistic to approach the holding restructuring scenario based on: (1) minimising conflicts with general investors, including foreign institutional investors, who have over 40% of ownership, (2) fewer transaction steps with less group level cash costs by using affiliates' existing ownerships, and (3) maximising the group's business efficiency and competitiveness post the restructuring. In this report, we analyse the transaction steps of three different HMG restructuring scenarios, including the positives and negatives of each scenario, and the cost and gain of affiliates and the Chung family. Scenario 1. Splitting HMC, Kia, and Mobis into Holdco and Opco, followed by three Holdco's merger to create the new HMG Holdco and Chung family's share transitions to acquire HMG Holdco. Scenario 2. Splitting Hyundai Mobis into Holdco and Opco, followed by Chung family's share transitions to acquire Mobis Holdco. Scenario 3. Splitting HMC into Holdco and Opco, followed by Chung family's share transitions to acquire HMC Holdco. In conclusion, we believe HMC, Kia, and Mobis' split into Holdco and Opco (Scenario 1) followed by the three Holdcos' merger is the mostly likely scenario which we will explain in detail below. We excluded the below two commonly discussed scenarios as these only benefit the Chung family while ignoring the interests of minority shareholders which is against the justification of 'Economic Democratisation'. (1) Merging Glovis with Mobis Mobis' minority shareholders could claim share purchase rights as the purpose of merging an auto parts company (Mobis) with a logistics company (Glovis) for better synergy may not convince shareholders. As seen from Samsung's case, setting the right merger ratio could also raise serious conflicts among shareholders. A 10% share purchase claim by Mobis' shareholders could incur a W2.4 tn cash requirement. (2) Equity share swap between ES Chung's Glovis and Kia's Mobis shares. As the whole purpose of the transaction is only to benefit ES Chung, we strongly believe this scenario is not realistic. Glovis experienced a 23% share correction within two days post ES Chung selling an 8.59% stake in 1Q15 to avoid the revised intra-group revenue transaction regulation. Not only did the stock fall steeply, it also fell further post the initial sell-off with multiple deratings despite resilient earnings. If Kia gets Glovis' shares without ES Chung's ownership, Glovis' share price could plunge further to reflect the loss of ES Chung's ownership premium which could raise more issues (such as malpractice) for general shareholders.

Korea Market Strategy 44 2 February 2017

Figure 61: Chung family’s stakes in major affiliates MK Chung (Chairman) ES Chung (Vice chairman) Aggregated 1/31/2016 Shares Stake MV or BV Share Total Shares Stake MV or Share Total Shares Stake MV or Share Total (mn) (%) (W bn) price (W) value (mn) (%) BV price (W) value (mn) (%) BV price (W) value after tax (W bn) after tax (W bn) after tax Hyundai Motor 11.4 5.2 1,590 139,500 1,240 5.0 2.3 700 139,500 546 16.4 7.5 2,290 139,500 1,786 Kia Motors 36,400 7.1 1.7 257 36,400 200 7.1 1.7 257 36,400 200 Hyundai Mobis 6.8 7.0 1,641 242,000 1,280 242,000 6.8 7.0 1,641 242,000 1,280 Hyundai Glovis 2.5 6.7 392 155,500 305 8.7 23.3 1,358 155,500 1,059 11.2 30.0 1,749 155,500 1,365 Hyundai Steel 15.8 11.8 917 58,200 716 58,200 15.8 11.8 917 58,200 716 Hyundai Wia 64,600 0.5 2.0 34 64,600 27 0.5 2.0 34 64,600 27 Innocean 58,000 0.4 2.0 23 58,000 18 0.4 2.0 23 58,000 18 Total 36.5 4,539 3,540 21.7 2,372 1,850 58.2 6,911 5,391 Note: Priced as of 31January 2017. Source: Company data, Datastream, Credit Suisse research

Figure 62: Major changes in HMG governance Date Transactions Anti-tunnelling Reorganisation 3/16/2012 HMC acquires 5% stake of Hyundai Hysco from JFE No Yes 4/24/2013 HMC acquires 5.44% stake of Hyundai Card from Hyundai Steel No Yes 6/26/2013 HMC liquidates 1.5 mn shares of Haevichi Resort to Glovis and Wia Yes No 1/1/2014 Hyundai Steel merges with Hysco's CRC business No Yes 1/1/2014 Hyundai Engineering merges with Hyundai Amco Yes Yes 8/19/2014 Hyundai Wia discloses acquisition plan of Hyundai Wisco and Metia Yes Yes 8/19/2014 Hyundai E&C acquires Hyundai E&C's HRD business Yes No 2/6/2015 Chung family sells 13.39% stake of Glovis Yes No 7/1/2015 Hyundai Steel acquires Hyundai Hysco No Yes 9/24/2015 ES Chung acquires 1.44% stake of HMC from No No 11/10/2015 ES Chung acquires 0.84% stake of HMC from Hyundai Samho Heavy Industries No No 12/22/2015 HMC spends W96 bn to raise its share in Hyundai Capital from 56.5% to 59.7% No Yes 12/22/2015 Kia spends W607 bn to acquire 20.1% of Hyundai Capital share No Yes 2/5/2016 HMC/Kia sold 6.6% of Hyundai Steel stakes; their shares decrease from 11.18%/19.57% to 6.87%/17.27% respectively No Yes Source: Company data, Credit Suisse research

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Scenario 1: HMC, Kia, and Mobis to split into Holdco and Opco followed by the three Holdcos' merger We believe splitting three companies (HMC, Kia, and Mobis) into Holdco and Opco followed by the three Holdco's merger would be the best scenario for the following reasons. (1) Creating HMG Holdco minimises cash costs. As the newly created HMC Holdco, Kia Holdco, and Mobis Holdco own the subsidiary of Holdco and Opco, the three Holdcos' merger requires actual cash costs of only W1.5 tn. This scenario minimises group level costs by leveraging the circular holdings. (2) Less steps to complete the structure. Despite the complicated concept of splitting three companies into Holdco and Opco followed by the three Holdcos' merger, the process requires fewer steps to complete the structure. (3) It is the ideal structure as every subsidiary is simply arranged under the new HMG Holdco. (4) It can maximise treasury shares up to 21% which can firmly support the group's holding structures.

Figure 63: Pros and cons of the three companies' Holdco and merger scenario Pros 1. Least group level costs as the newly created Holdco already owns the subsidiary's Opco and Holdco. 2. Ideal structure as every subsidiary is simply arranged. 3. HMC, Kia, and Mobis can create leaner organisations, increasing ROE. 4. HMG can have financial subsidiaries through forming intermediary financial holdcos if the proposed regulation is passed. 5. Over 21% of treasury shares firmly support the group's holding structures. Cons 1. Requires the longest period of time with many shareholder meetings. 2. During stake swap between holdco-opco, the owners' controlling power on HMG holdco could weaken. 3. Requires many shareholder meetings/steps—it could be very controversial on the split/merger ratio. 4. HMG will need to sell its financial subsidiaries if the proposed intermediary financial holdco regulation is not passed. Source: Credit Suisse estimates

Figure 64: Our assumption on split ratio—30% for Holdco and 70% for Opco (W bn, %) Hyundai Motor Kia Motors Equity of auto financing division 6,385 Subsidiaries' value 7,450 6,226 Treasury shares 1,884 167 50% of net cash 7,150 932 Total value of subsidiaries & net cash (A) 22,869 7,325 HMC/Kia's owner's equity (B) 71,404 25,583 Split ratio (A/B) 32% 29% Note: We assume auto financing division, subsidiaries, treasury shares, and 50% of net cash to be held by Holdco. Source: Company data, Credit Suisse estimates

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Figure 65: Splitting Mobis, HMC, and Kia into Holdco and Opco (split ratio of 30% for Holdco and 70% for Opco)

Source: Credit Suisse estimates

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Figure 66: Chung family ownership post-split

Source: Credit Suisse estimates

Korea Market Strategy 48 2 February 2017

Figure 67: Three Holdcos merge as HMG Holdco

Source: Credit Suisse estimates

Figure 68: HMG Holdco to acquire Hyundai Steel and Glovis' HMG Holdco shares as treasury and acquire Mobis Opco

Source: Credit Suisse estimates

Figure 69: ES Chung & MK Chung give their Glovis, Opco (HMC, Kia, Mobis), and affiliates' stakes (Hyundai Steel, Hyundai Wia, Innocean) and get the new shares of HMG Holdco

Source: Credit Suisse estimates

Korea Market Strategy 49 2 February 2017

Figure 70: New Hyundai Motor Group structures (Won tr, %) MK Chung 16.6% 4.5 0.0 ES Chung 8.6% 2.3 0.0 Innocean

Treasury shares HMG Holdco 21.4% 5.9

32.2% 5.3 34.2% 7.4 36.7% 3.8 30.0% 1.7 36.0% 2.8 40.7% 0.7 34.9% 1.6

Mobis Opco HMC Opco Kia Opco Glovis Hyundai Steel Hyundai Wia Hyundai E&C

Source: Credit Suisse estimates

Figure 71: Total costs and gains under three Holdcos and merger scenario Estimated costs and gains (Won tr) Costs Gain HMG Holdco to acquire Hyundai Steel's Mobis Opco 0.9 Hyundai Steel pays capital gain tax (22%) 0.2 Hyundai Steel gets cash after tax 0.7 HMG Holdco to acquire Glovis' Mobis Opco 0.11 Glovis pays capital gain tax (22%) 0.02 Glovis gets cash after tax 0.09 HMG Holdco to acquire Hyundai Steel's HMG Holdco as treasury 0.30 Hyundai Steel pays capital gain tax (22%) 0.07 Hyundai Steel gets cash after tax 0.24 HMG Holdco to acquire Hyundai Steel's HMG Holdco as treasury 0.11 Hyundai Steel pays capital gain tax (22%) 0.02 Hyundai Steel gets cash after tax 0.09 HMG Holdco issues news shares to acquire affiliate shares from ES chung & MK Chung 5.63 ES Chung gives Glovis, Kia Opco, HMC Opco, Wia, and Innocean stakes to get new shares of HMG Holdco 2.06 MK Chung gives Glovis, HMC Opco, Mobis Opco, Hyundai Steel to get new issues of HMC Holdco 3.57 Total group level transaction costs including new share issues 7.1 7.1 Actual cash costs excluding new share issues 1.5 1.5 Note: Green coloured row includes transactions between HMG Holdco and Chung family. Source: Company data, Credit Suisse estimates

Figure 72: Assumptions for HMC/Kia/Mobis valuation ROE - g PBR= Cost of Equity = Risk free rate + (Beta x risk premium) Cost of Equity - g HMC Kia Mobis Risk free rate 2% 2.0% 2.0% 2.0% Market risk premium 8% 8.0% 8.0% 8.0% g = long term growth rate (g) 1.0% 1.0% 1.0% Beta 1.2 1.3 1.0

Cost of equity = risk free rate + (Beta x market risk premium) (CE) 11.4% 12.3% 9.7% Source: Credit Suisse estimates

Korea Market Strategy 50 2 February 2017

Figure 73: Valuation of Holdco (Won bn, %, x) HMC Holdco Kia Holdco Mobis Holdco 2016 sales1 72,684 54,741 34,320 2016 pre-tax profit 7,307 3,442 4,111 2016 equity method income (A) 1,729 1,191 1,090 Brand royalty (20 bp of sales) (B) 145 109 69 Financing arms' OP (C) 703 Tax rate (D) 22% 22% 26% Net cash2 14,300 1,863 4,796 Net cash split ratio 50% 50% 50% Subsidiary's value (1) 7,450 6,226 6,918 Treasury (2) 1,884 167 712 Net cash (50% to go to holdco) (3) 7,150 932 2,398 Financial subsidiaries' equity3 (4) 6,385 Holco's equity (5) = (1) + (2) + (3) + (4) 22,869 7,325 10,028 Holdco's net profit (E) = ((A) + (B) + (C))*(1-(D)) 2,018 1,018 859 Holdco's ROE (F) = (E) / (5) 9% 14% 9%

Intrinsic P/B (G) = ((F) - (g)) / (CE) - (g) 0.75 1.14 0.87 Intrinsic P/E (H) = (G) / (F) 8.5 8.2 10.2 Net cash (5) 7,150 932 2,398 Market cap post the split (I) 9,417 4,591 7,768 Target market cap (J) = ((E ) * (H)) + (5) 24,351 9,290 11,137 Upside (K) = (J) / (I) 159% 102% 43% Note: 1 HMC: auto division sales, Mobis: module division sales; 2 Assuming 50% of net cash to go to holdco; 3 Assuming auto financing division to go to HMC Holdco Source: Credit Suisse estimates

Figure 74: Valuation of Opco (Won bn, %, x) HMC Opco Kia Opco Mobis Opco Market cap post the split (A) 21,973 10,712 18,125 Opco's owner's equity (B) 48,535 18,258 17,318 Opco's net profit (C) 3,702 1,676 2,188 Opco's ROE (D) = (C) / (B) 8% 9% 13%

Intrinsic P/B (E) = (D) - (g) / (CE) - (g) 0.64 0.72 1.34 Intrinsic P/E (F) = (E) / (D) 8.4 7.9 10.6 Net cash (G) 7,150 932 2,398 Target market cap (H) = (C) * (F) + (G) 38,080 14,145 25,616 Upside (I) = (H) / (A) 73% 32% 41% Source: Credit Suisse estimates

Figure 75: Valuation summary—upside from current market cap (W bn, %) HMC Kia Mobis Current market cap for HMC/Kia/Mobis 31,389 15,302 25,893 Target market cap for Holdco 24,351 9,290 11,137 Target market cap for Opco 38,080 14,145 25,616 Target market cap for HMC/Kia/Mobis 62,431 23,435 36,752 Upside (%) 99% 53% 42% Source: Datastream, company data, Credit Suisse estimates

Korea Market Strategy 51 2 February 2017

Figure 76: HMC, Kia and Mobis—current market cap vs. market value of subsidiaries, net cash and treasury shares

(W tn) 40 75% of 30 mkt cap 48% of 20 54% of mkt cap mkt cap 10

0 HMC Kia Mobis

market cap Subsidiaries' value Net cash Treasury shares

Source: Datastream, company data, Credit Suisse estimates

Korea Market Strategy 52 2 February 2017

Scenario 2: Mobis to split into Holdco and Opco As Mobis is the largest shareholder of Hyundai Motor and MK Chung currently controls the group by owning Mobis the most, splitting Mobis into Holdco and Opco followed by Chung family's share swap has always been one of likely scenarios. Under the scenario, Chung family can maximise Mobis Holdco shares to 43% by executing the following steps.

Figure 77: Splitting Mobis into Holdco and Opco (split ratio of 30% for Holdco and 70% for Opco)

Source: Credit Suisse estimates

Figure 78: Pros and cons of Mobis Holdco scenario Pros 1. Chung family can secure 42.6% of Mobis Holdco shares. 2. It only requires a Mobis shareholder meeting thus could be done in a relatively short period of time. 3. Over 12% of treasury shares firmly support the group holding structures. Cons 1. Group level execution costs are high. 2. Requires more transactions to complete the holding structures. 3. Still Kia & Glovis have Mobis Opco stakes. 4. Kia & Hyundai Steel are grandson companies; thus they must own 100% of their subsidiaries. 5. Hyundai Motor must sell its financial subsidiaries if the proposed intermediary financial holdco regulation is not passed. Source: Credit Suisse estimates

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Figure 79: Chung family ownership post-split

Source: Credit Suisse estimates

Figure 80: Mobis Holdco acquires Mobis Opco shares from Kia, Hyundai Steel, and Glovis

Source: Credit Suisse estimates

Figure 81: Mobis Holdco acquires Glovis, HMC, Mobis Opco stakes from ES Chung & MK Chung by issuing new shares

Source: Credit Suisse estimates

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Figure 82: Mobis Holdco to acquire affiliates' Mobis Holdco as treasury shares

Source: Credit Suisse estimates

Figure 83: ES Chung & MK Chung sell their affiliate stakes and acquire Mobis Holdco shares

Source: Credit Suisse estimates

Figure 84: HMC to buy MK and Kia's Hyundai Steel stakes

Source: Credit Suisse estimates

Korea Market Strategy 55 2 February 2017

Figure 85: Hyundai Mobis Holding company scenario

Source: Credit Suisse estimates

Figure 86: Total costs and gains under Hyundai Mobis Holding company scenario

Note: Green coloured row includes transactions between HMG Holdco and Chung family. Source: Company data, Credit Suisse estimates

Korea Market Strategy 56 2 February 2017

Scenario 3: HMC to split into Holdco and Opco Splitting HMC into Holdco and Opco, followed by the Chung family's share transitions to acquire HMC Holdco is also one of the possible scenarios the group could take. The HMC Holdco scenario is rather comfortable at the group level as: (1) HMC already owns most of the subsidiaries in the group including Kia (34%), Hyundai Steel (7%), Hyundai E&C (21%), Hyundai Wia (25%), and (2) HMC has the biggest net cash position (W14.4 tn) and the highest treasury shares (6%) in the group which can be used for the group holding structure changes. Here are the steps that this would follow.

Figure 87: Splitting Hyundai Motor into Holdco and Opco (split ratio of 30% for Holdco and 70% for Opco)

Source: Credit Suisse estimates

Figure 88: Pros and cons of Hyundai Motor Holdco scenario Pros 1. HMC already owns most subsidiaries and uses its ample cash holding for transactions. 2. Ideal structure as every subsidiary is simply arranged. 3. HMG can have financial subsidiaries through forming an intermediary financial holdco if the proposed regulation is passed. 4. Over 14% of treasury shares firmly support the group's holding structures. Cons 1. Group level execution costs are the highest. 2. Mobis is under Kia as a grandson company; Mobis must own 100% of its subsidiaries. 3. Kia should spend its cash to purchase Mobis (maybe against Kia shareholders' will). 4. Hyundai Motor will need to sell its financial subsidiaries if the proposed intermediary financial holdco regulation is not passed. Source: Credit Suisse estimates

Korea Market Strategy 57 2 February 2017

Figure 89: Chung family ownership post-split

Source: Credit Suisse estimates

Figure 90: HMC Holdco to acquire HMC Opco shares and also get HMC Holdco shares as treasury from Mobis

Source: Credit Suisse estimates

Figure 91: ES Chung & MK Chung gives Glovis & HMC Opco stakes to get new issues of HMC Holdco

Source: Credit Suisse estimates

Korea Market Strategy 58 2 February 2017

Figure 92: Kia acquires Mobis shares from Hyundai Steel to disconnect circular holdings

Source: Credit Suisse estimates

Figure 93: HMC acquires Hyundai Steel, Hyundai Wia, and Hyundai E&C shares from affiliates

Source: Credit Suisse estimates

Figure 94: New Hyundai Motor Group structures (Unit: %, Won tr)

MK Chung 11.6% 2.0 ES Chung 12.1% 2.1

23.7% 4.0

HMC Holdco 14.5% Treasury shares

34.24% 7.4 33.88% 5.0 34.88% 2.0 24.15% 1.9 34.91% 1.6 38.78% 0.7

HMC Opco Kia Glovis Hyundai Steel Hyundai E&C Hyundai Wia

22.53% 5.3

Hyundai Mobis

Source: Credit Suisse estimates

Korea Market Strategy 59 2 February 2017

Figure 95: Total costs and gains under Hyundai Motor Holding company scenario

Note: Green coloured row includes transactions between HMG Holdco and Chung family. Source: Credit Suisse estimates

Korea Market Strategy 60 2 February 2017

Stock picks: Buy Mobis and HMC over Glovis Splitting a company into a Holdco and an Opco has historically increased the overall value of a company as: (1) it improves the corporate structure, (2) it increases the dividend payout ratio, and (3) recognises hidden value (asset revaluation) which can trigger a multiple rerating. As such, the Hyundai Motor Group trio (HMC, Kia, and Mobis) should all benefit if scenario 1 is executed.

Figure 96: and Hankook Tire's Figure 97: Mando and Halla Holding's combined combined market cap increased post the split market cap increased post the split

(W tn) Day of split Capital increase with (W tn) Day of split 12 consideration 4 10 3 8

6 2 4 1 2 0 0 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Hankook Tire Hankook Tire Worldwide Mando Halla holdings

Source: Company data, Credit Suisse estimates Bloomberg Source: Company data, Credit Suisse estimates Bloomberg

Figure 98: HMC, Kia and Mobis—current market cap vs. market value of subsidiaries, net cash and treasury shares

(W tn) 40 75% of 30 mkt cap 48% of 20 54% of mkt cap mkt cap 10

0 HMC Kia Mobis

market cap Subsidiaries' value Net cash Treasury shares

Source: Company data, Credit Suisse estimates Datastream

Hyundai Mobis (positive). In general, auto parts receives higher valuation multiple over OEMs. Yet, despite higher earnings stability and visibility over OEMs (HMC, Kia), Mobis has received a bigger discount relative to global peers. The market has long been speculating that Mobis' value should be discounted so that ES Chung can acquire Mobis at a cheaper price with higher ownership under the Mobis Holdco scenario. Given that the speculation will no longer be valid post any scenarios, Mobis should be rerated. Currently, Mobis trades at a 45% discount to global peers which is wider than HMC's 22%. Mobis remains our sector top-pick with stable earnings growth outlook coming from both defensive after-sales parts (A/S) and growing core parts (Continuous outperformer).

Korea Market Strategy 61 2 February 2017

Figure 99: Mobis has been trading at a bigger Figure 100: …which should provide higher valuation discount to global peers over HMC… upside post the group restructuring

(%) (%) 300 0 Mobis underperformed -22 -25 200 Mobis outperformed

-50 -45 100 -75 0

-100 -100 ES Chung sold -125 -200 8.6% of share in Jan 2015 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 Mobis discount to global peers HMC discount to Global peers Rel. performance (Mobis vs Glovis)

Source: Company data, Credit Suisse estimates Datastream Source: Company data, Credit Suisse estimates Datastream

Hyundai Motor (positive). Among the HMG trio, HMC's operating value is most undervalued. As MK Chung and ES Chung have a combined HMC value of W2.5 tn (vs Mobis' W1.9 tn and Kia's W0.3 tn), the value increase in HMC could increase the Chung family's ownership on the new HMG Holdco the most. Besides, we expect HMC to fundamentally turn around on the back of: (1) EM auto demand recovery, (2) rising SUV sales mix, which will be translated into double digit EPS growth in 2017E (Expecting a better 2017E outlook to overcome the poor 4Q16 results). Kia Motors (neutral). Although Kia's stock split is also a positive, we are cautious on Kia as there are various concerns, such as: (1) Mexico plant uncertainty post the US presidential election, (2) 'ordinary wage' disputes that could incur potential one-off provisioning of W645 bn in 1Q17E, and (3) its entry into the small sedan product cycle in 2017 that will deteriorate its SUV sales mix (Rising uncertainty with weakening sales mix). Hyundai Glovis (negative). As the group restructuring requires Chung family's Glovis share swap with HMG Holdco shares, Glovis will lose the owner's (Chung family) premium which is a negative for the stock. In 1Q15, the market already saw a sharp share correction post the Chung family's sale of 13.4% of its Glovis stake in 1Q15 (Glovis initiation report).

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Lotte Group: Value accretion from Holdco formation already in the price The holdco formation of Lotte Group has already been made official by management and the listed companies' public disclosure. Lotte Group Chairman's commitment to improve group transparency, and the potential regulation change on holdco could be strong incentives for Lotte Group to accelerate the procedure to form a holdco. Lotte Group is different from other major Korean conglomerates in that the key affiliate companies are heavily owned by the owner family/affiliates but complicatedly cross-held. This implies the group will have multiple options to maximise the major shareholders' ownership without much affecting minority shareholders' interests. We expect the initial step would be to make Lotte Shopping into a holdco, since this is the biggest asset the family owns (except for Hotel Lotte), and is the only company that has a treasury stake. To meet the holdco rules, Lotte Shopping could list some affiliates, as disclosed by management, and reshuffle by swapping its investment holdings. The reshuffling of affiliates (IPO/sell-off/split-up/merger, etc.) could help Lotte affiliates to improve their balance sheets and capital management. However, as for Lotte Shopping, we believe that the value accretion should be limited unless we see a turnaround in its core retail operations. In this part of the report, we discuss how the group structure could change and the sensitivity of the value of Lotte Shopping in case of a group structure change. Holdco: Key incentives for management We believe management's incentives to accelerate the holdco transformation are: (1) to strengthen family ownership amid the proxy fight among owner family members, (2) a potential change of holding company regulation, which could make the process longer than before. Strengthen ownership The holdco formation has already been made official by management and the listed companies' public disclosure. We believe recent news flows are signs that this process could be accelerated to simplify the ownership structure, even with delays in Hotel Lotte's IPO, which has been considered as the first step to form a holding company. First, Lotte Group Chairman Dongbin Shin made a public announcement on 25 Oct 2016, promising a New Lotte Group through (i) the setting up of a compliance committee, (ii) cleaner corporate governance, (iii) an IPO of Hotel Lotte to ‘diversify shareholder mix and to further invest in the hotel/DFS business'. Second, on 20 January 2017 Lotte Shopping, Confectionary, Chilsung and Food have made a public disclosure that, 'to untangle the circular ownership structure and to improve corporate governance, the companies have been considering forming a holdco structure, through various corporate actions, such as split-up, merger, split up/merger, as part of the group structure change, but that nothing can be confirmed at this stage' (source: dart.fss.or.kr). The process has been talked of by the media and the market, post the rivalries over inheritance between the family members (The Economist, 15 Aug 2015) since 2014. Since then, there have been several shareholders' meetings to confirm Lotte Holdings Co (Japan)'s support to Chairman DB Shin.

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Figure 101: Lotte Group proxy fight details Key dates Event Results 17-Aug-2015 DB Shin convened EGM to discuss reforming the BoD and compliance management issues Lotte Holdings Co shareholders support DB Shin's proposal 6-Mar-2016 DJ Shin proposes dismissing DB Shin Lotte Holdings Co shareholders reject DJ Shin's proposal 25-Jun-2016 DJ Shin proposes dismissing DB Shin and President Takayuku Tsukuda Lotte Holdings Co shareholders reject DJ Shin's proposal Source: News articles (Y onhap, News1), Credit Suisse research Regulation change As discussed in the first part of this report, the potential regulation changes on holdcos include: (1) unwinding of cross-ownership, 2) increasing the requirement of minimum holdings in affiliate companies to 30/50% from the previous 20/40% (for listed/unlisted affiliates respectively), (3) restricting the use of treasury shares for a holdco transition, and (4) tighter regulation in intra-group revenue generation/transaction. Of the four different categories subject to potential changes, we believe Lotte Group could be mainly impacted by the rules on cross-ownership, as it is the most complicatedly cross-held, with 92 circular ownerships outstanding as of end-3Q16.

Figure 102: Lotte Group—impact on ownership structure from regulation changes Regulation category Current ownership In the process of After completion of Remarks structure ownership holdco transition restructuring Current Amended Current Amended Current Amended Cross ownership N Y N N N N Our scenario assumes most cross holdings will be untangled Holding company N N N N N N All listed affiliates are at least 40% owned by related affiliates/owner family Treasury shares N N N N N N Lotte does not necessarily need to utilize treasury holdings to form the holdco Intra-group transactions N N N N N N This issue is not so relevant to Lotte Group Source: Credit Suisse estimates. How is Lotte Group different from other groups? Key issues/differences vs other conglomerates that changed or need to change into holdcos Unlike other conglomerate peers in Korea: (1) Lotte does not need to chase for additional ownership because most key affiliates are heavily owned by the family and/or by the affiliate companies to meet the minimum requirement of holdings (20%, 40% rules). Also, because the affiliates/family’s ownership in the key companies are high enough, the group has multiple options when it comes to changing the structure. As seen in Figure 103, given the key affiliates are heavily owned by the family and affiliate companies, there is no need to additionally increase ownership. As such, the owner family's interest could be less focused in aligning interests of the minority shareholders.

1)

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Figure 103: Key affiliates are heavily owned by the family and affiliate companies % Lotte Conf Lotte Chilsung Lotte Food Lotte Shopping Lotte Chem Hotel Lotte Fujifilm Lotte Trading Lotte Corp Listed Listed Listed Listed Listed Not listed Not listed Not listed Not listed Affiliates 21.8 34.1 36.4 41.2 45.7 0.7 74.5 82.2 31.1 Shin, DB 9.1 5.7 2.0 13.5 0.3 - - - 0.0 DB-friendly holdings/Japan 9.9 1.4 4.3 - 9.3 91.7 - - 62.0 Total 40.7 41.2 42.7 54.6 55.2 92.4 74.5 82.2 93.1

Shopping+hotel+DB 12.3 11.6 14.3 28.5 12.9 0.2 8.0 62.3 31.1 Hotel 3.2 5.9 8.9 8.8 12.7 0.2 8.0 34.6 31.1 Shopping - - 3.5 6.2 - - - 27.7 - Confec - 19.3 9.3 7.9 - - - - - Chilsung - - 9.3 3.9 - - 5.0 - - Chem - - 1.0 - 1.7 - - - - Lotte Fujifilm - - - 7.9 - - - - - Trading ------56.8 - - Corp - - - - 31.3 - - - - Source: Company data

(2) Ownership competition between family members. The group is already a quasi-holding company structure, with Hotel Lotte, unlisted and owned by the family, at the top of the group. At the same time, however, the ownership competition among owner family members could make the issue complex and may need support from other shareholders. (3) Multiple circular ownerships that need to be untangled. According to the Korea FTC, there are 67 circular ownerships outstanding with multiple scenarios possible for untangling this complex circular ownership structure. As seen in Figure 104 below, our analysis suggests there are 92 circular ownerships outstanding, based on 3Q16 financial reports. Of these 92, 60 can be solved if Daehong Comm sells its 3.3% stake in Lotte Confectionery, 14 if Lotte Chilsung sells 2.2% in Lotteria (which can be solved when Lotteria gets listed as per management's comment to the media such as Korea Economic Daily) and an additional 12 if Lotte Confectionery, Fujifilm, Data Comm, Chilsung and E&C sell their holdings in Lotte Shopping. These will be untangled to meet the holdco rules, and will have two-year grace period to reshuffle the ownership among the major shareholders and shareholder companies (Hotel Lotte and Lotte Shopping).

Figure 104: Circular ownership details Company % ownership in Holdings in # of circular ownership Daehong Comm 3.3% Lotte Confectionery 60 Lotte Chilsung 2.2% Lotteria 14 Lotte Data Comm 4.8% Lotte Shopping 6 Lotte Chilsung 9.3% Lotte Food 5 Fuji 7.9% Lotte Shopping 3 Lotte Confectionery 7.9% Lotte Shopping 1 Lotte Confectionery 9.3% Lotte Food 1 Lotte Chilsung 3.9% Lotte Shopping 1 Lotte E&C 1.0% Lotte Shopping 1 Source: Company data, Credit Suisse research

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Strategy Market Korea Figure 105: Lotte Group shareholding structure

Hotel Lotte (T-shares: 0.2%)

Food & Beverage Retailing Petrochem / E&C Finance

0.6%

8.8% 31.1% Lotte Corp 3.9% Lotte Shopping 2.6% 5.9% Lotte Chilsung (T-shares: 6.2%) 22.3% 8.9% 31.3% 11.8% 26.6% 19.3% Lotte Capital 7.9% 0.8% 7.9% 12.7% Lotte Chemical 3.2% 4.8% (T-shares: 1.7%) 11.5% 1.5% 1.8% 15.3% Lotte Confectionery Hotel Lotte Busan 8.2% 3.9% 13.2% Lotte Aluminium 1.0% 3.3% 25.0% Lotte Card 16.5% Korea Seven 93.8% 51.1% 13.6% 38.7% 27.7% 8.0% 2.2% 18.8% 2.6% 5.5% Lotte Trading 56.8% Korea Fuji Film Lotteria 34.6% 2.1% Lotte Insurance 23.7% (T-shares: 0.9%) 6.2% 5.0% 11.3% 35.2% 43.1% 16.2% Lotte E&C 1.5% 3.3% 10% Lotte Data Comm 2.9% 34.0% 16.3% 34.5% 12.5% 5.3% 9.3% Daehong Comm. 28.5% 8.9% 6.1% Lotte Food 4.4% (T-shares:0.04%) 10% 3.5%

2 February 2017 2 February

Source: Company data, Credit Suisse research

66

Strategy Market Korea Figure 106: Lotte Group shareholding table

Lotte Non- Affiliates/ Lotte Lotte Hotel Lotte Lotte Lotte Lotte Daehong Lotte Lotte Lotte Lotte Data Korea Lotte Conf Lotte Food Lotte E&C Hotel Lotte Lotteria Fujifilm Lotte Corp Lotte Card Life Shareholder Chilsung Aluminium Busan Trading Shopping Chem Comm Station Logistics Capital Comm Seven Insurance

Lotte Conf 19.3 9.3 7.9 13.6 8.9 4.6 6.1 16.5 Lotte Chilsung 9.3 3.3 3.9 2.2 5.0 4.6 1.5 1.5

Lotte Food - 10.0 7.5 5.0 1.8 Lotte Aluminium 15.3 8.9 10.0 6.2 2.6 Lotte E&C 1.0 11.8 Hotel Lotte 3.2 5.9 8.9 25.0 43.1 0.2 34.6 8.8 18.8 12.7 8.0 16.3 31.1 8.8 26.6 2.9 23.7 Hotel Lotte Busan 4.4 3.9 0.6 - 0.8 11.3 1.0 11.5 1.0 5.5 Lotte Trading 56.8 0.2 Lotte Shopping 3.5 27.7 6.2 38.7 34.0 25.0 4.6 22.4 51.1 93.8 Lotte Logistics 13.7 13.8 Lotteria 2.1 12.5 17.3 2.6 34.5 Lotte Chem 1.0 13.2 35.2 1.7 4.6 Fujifilm 7.9 1.7 Daehong Comm 3.3 2.9 8.2 28.5 16.2 Lotte Corp 31.3 Lotte Capital 4.6 Lotte Data Comm 5.3 4.8 0.2 Lotte Card - Lotte.com Lotte Station 7.1 Lotte Non-life Insurance 0.9 Treasury shares - - 0.0 - - 0.2 - - 6.2 ------0.0 Family/Family owned inv cos SHIN, DB 9.1 5.7 2.0 - 0.6 - - - 13.5 - 0.3 - - - 0.0 - 0.9 6.8 9.0 0.3 1.4 SHIN, DJ 4.0 2.8 2.0 - 0.4 - - - 13.5 - - - - - 0.0 - 0.5 4.0 4.1 0.2 - Other family 18.0 4.0 1.4 0.1 0.2 - 2.0 - 0.0 22.1 21.0 - 6.9 1.0 4.2 4.5 0.2 - Japan Lotte Holdings 1.5 19.1 46.6 9.3 57.0 L1~L12 Investments 4.3 34.9 72.7 46.5 15.5 5.0 45.3 Kwangyoonsa 22.8 5.5 6.8 1.9 Others 9.9 7.7 4.1 2.1 10.5 Source: Company data, Credit Suisse research

2 February 2017 2 February

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Rough structure already there: Hotel Lotte at the top; Shopping is next We believe that in the long-term, Hotel Lotte will be at the top of the structure among the Lotte affiliate companies, but Hotel Lotte does not necessarily need to form a holding company in the near term given: (1) the IPO of Hotel Lotte is delayed, (2) the financial companies which are currently owned by both Lotte Shopping and Hotel Lotte, are not allowed to be part of a holding company, unless it is through an intermediary financial holding company. If Hotel Lotte is listed as scheduled, and in case the bill on intermediary financial holdco is passed, Hotel Lotte could change into a holdco.

Figure 107: Final structure Figure 108: Final structure—if Intermediary financial holding company is allowed

Family/Investment entities Family/Investment entities

Hotel Lotte Hotel Lotte

Financial Hold Co Shopping Hold Co Financial Hold Co

Hotel Lotte OpCo, Lotte Shopping, Lotte Shopping, Lotte Conf, Lotte Capital, Lotte Capital, Lotte Conf, Lotte Chilsung, Lotte Chilsung, Lotte Food Lotte Insurance, Lotte Insurance, Lotte Food, Lotte Chem, Lotte Chem, Lotte E&C, Lotte Card Lotte Card Lotte E&C, Lotte Aluminium Lotte Aluminium and etc… and etc…

Source: Credit Suisse estimates Source: Credit Suisse estimates

In the long term, we expect Shopping to acquire consumer affiliates from Hotel and other affiliates, and sell financial affiliates to Lotte Corp. Lotte Corp, in turn, would sell Chemical to Hotel or Shopping. Hotel would buy Lotte Shopping from affiliate companies (i.e. Confec, Chilsung etc) and sell holdings in consumer affiliates to Shopping.

Figure 109: Lotte Group—before vs after

Lotte Hotel Lotte Hotel

Consumer affiliates Lotte Chem/E&C

Lotte Shopping Lotte Corp Lotte Shopping/Confec Lotte Corp

Financial affiliates Lotte Chem/E&C Consumer affiliates Financials

Source: Credit Suisse estimates

Because the ownership by family/affiliates is high, we believe there are multiple scenarios possible to reach the final holding company structure. We have looked at various cases and conclude that the Shopping + Confectionery merger, followed by holdco formation, should be the least costly procedure for the group. As such, Lotte Shopping + Confectionery (merged entity) should initially become the holding company to be the holding company for the key consumer companies. Through this, the owner family could maximise their ownership. Lotte Shopping has got 6% of treasury stake, and is the largest asset owned by the owner family.

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Four steps to form a holdco structure Through the process of forming a holding company, the company's management should aim to (1) strengthen ownership of the owner family, especially the Chairman of the Group, DB Shin, (2) cut circular ownership and (3) minimise cash burden by the family and affiliate companies. Key issues would be, how to rearrange the ownership of the financial companies, since the current regulation does not allow a holdco to own an intermediary financial holdco and how to minimise the affiliate companies' cash burden, especially of the quasi holding companies, such as Hotel Lotte, Lotte Shopping. Step 1 Merger between Confectionery and Shopping, as this would reduce the cost for Lotte Shopping to W778 bn from W1.4 tn if Lotte Shopping were to go as holdco.

Figure 110: Step 1—merger of Lotte Shopping and Confectionery

Hotel Lotte

31.1% 12.7% 25% 3.2% 8.8%

Lotte Chem 13.2% 15.3% Lotte Shopping Lotte Corp 31.3% Lotte Aluminium Lotte Confectionery 7.9% (T-shares:1.7%) (T-shares: 6.2%)

35.2% 10% 19.3% Lotte Chilsung 43.1% 3.3% Lotte E&C 64% Lotte Himart 3.5% Lotte Food 9.3% 53% Homeshopping 38.7% 13.6% Lotteria

27.7% Lotte Trading 25% 8.9% Lotte Station

34% Daehong Comm 4.6% Lotte Logistics 4.6%

22.4% Lotte Capital 51.1% 16.5% Korea Seven 93.8% Lotte Card

6.1% Lotte Data Comm

Source: Credit Suisse estimates

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Step 2 Merger of Hotel Lotte and Lotte Aluminium (15.3% holder of Lotte Confectionery) for Hotel to increase holdings in Shopping + Confectionery holdco.

Figure 111: Step 2—merger of Hotel Lotte and Lotte Aluminium

Hotel Lotte

31.1% 12.7% 38.2% 7%

6.5% Lotte Confectionery + Lotte Shopping Lotte Corp 31.3% Lotte Chem Lotte Aluminium (merged entity)

48.5% 43.1% Lotte E&C

34% 36% 85% 81% 82% 50% 65% 53% 93.8% 88% 46% 73%

Korea Home Daehong Data Chilsung Food Lotteria Trading Logistics Himart Card Capital Station Seven shopping Comm Comm

Food & Beverage Retailing Finance Others

Source: Company data [delete?], Credit Suisse estimates Step 3 Lotte Confectionery + Shopping (merged entity) split up into Holdco and Opco and secure at least 20%/40% shares of each affiliate. Under the current holdco regulation, the number of circular ownership among affiliates will be reduced. Most of the circular holdings will be cut when Daehong Communications sells its 3.3% stake in Lotte Confec and four affiliate companies sell down 18% of Lotte Shopping holdings to Hotel Lotte or the owner family.

Figure 112: Step 3—merged Lotte Confectionery + Shopping split into Holdco and Opco

Hotel Lotte + Aluminium 13.5%->31.5% if/when Hotel acquires 25.5% of Shopping holdings owns by 31.1% 12.7% affiliates Lotte Confectionery + Lotte Shopping Lotte Corp 31.3% Lotte Chem (HoldCo)

96.8% 13.5%->31.5% if/when Hotel acquires 25.5% of Shopping holdings owns by Lotte E&C affiliates

34% 36% 50% 85% 81% 82% 50% 65% 53% 93.8% 88% 46% 73% Conf +Shopping Korea Home Daehong Data Chilsung Food Lotteria Trading Logistics Himart Card Capital Station (OpCo) Seven shopping Comm Comm

Food & Beverage Retailing Finance Others

Source: Credit Suisse estimates Step 4: Last step—financial affiliates Lotte Shopping and Hotel Lotte are the largest holders of three financial affiliates: Lotte Card, Lotte Capital and Lotte Insurance. Under the current regulations, a holding company can neither own financial companies nor intermediary financial holding companies as affiliates. As discussed in the previous section, the bill allowing financial holding company

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to be an affiliate of a holding company is submitted, but it is uncertain whether the bill is going to be passed. In any case, the split-up of the finance affiliate is required, but a two- year grace period is allowed to split the financial affiliates from the holding company.

Figure 113: Step 4—last step will be the financial affiliates

Hotel Lotte + Aluminium

31.1% 20% 60% post share swap

Lotte Corp Lotte Chem Lotte Confectionery + Lotte Shopping 24% (HoldCo)

96.8%

Lotte E&C

93.8% 88% 34% 36% 50% 85% 81% 82% 50% 65% 53% 46% 73% 74% Conf + Shopping Korea Home Daehong Data Card Capital Chilsung Food Lotteria Trading Logistics Himart Station (OpCo) Seven shopping Comm Comm

Finance Food & Beverage Retailing Others

Source: Company data [delete?], Credit Suisse estimates Multiple other scenarios are possible, but less efficient Given the heavy ownership by the affiliates and related parties, there are multiple options management could consider:

■ Lotte Shopping holdco could be one likely scenario, but Lotte Shopping's cash outflow could be more substantial compared to other scenarios.

■ Hotel Lotte Holdco, Hotel Lotte + Lotte Shopping holdco: these two scenarios could be a shortcut to management's goal to improve the corporate structure, but need to be preceded by Hotel Lotte's IPO, which is delayed, and the bill on intermediary financial holdcos need to be passed, unless management considers selling the financial companies.

■ Lotte Shopping holdco + Confectionery holdco + Chem holdco: this should be the least costly for the whole group, but should take the longest in terms of forming a holdco for each key affiliate, which needs to go through each company's shareholder approval. Upgrade Lotte Shopping to Neutral We upgrade Lotte Shopping to NEUTRAL from Underperform. Our new target price of W220k, based on SoTP assuming Lotte Shopping would form a holding company. We believe that while there is still uncertainty in the domestic consumption outlook, the formation of a holding company could result in better operational efficiency for each affiliate company, especially those which are split-up and listed separately. As such, this could narrow down the gap vs its peers. Value unlocking through asset reshuffling Our fair value estimates based on our current earnings estimates suggests that the current price is reflecting the additional value that will emerge post the structure change. Based on our analysis, of the aggregate holdco + opco value, the value of affiliates/investment holdings is half of the total NAV, which could be revalued depending on the potential IPOs of these companies, as per company disclosure.

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Figure 114: SoTP assuming Lotte Shopping forms holdco Holdco NAV Rationale Opco NAV 1,427 7x/8x EV/EBITDA for Dept store/hypermarket respectively Consolidated affiliates 3,639 Lotte Card 1,911 Samsung Card 0.7x Lotte Himart 644 Market price Korea Seven 552 Peer average FY17 consensus P/E Woori Homeshopping 256 Peer average FY17 consensus P/E Others 276 Related affiliates 1,346 Lotte Trading 194 FY16 book value Lotte Station 122 FY16 book value Lotte Capital 196 FY16 book value Lotte Asset Develop 49 FY16 book value Lotteria 218 FY16 book value Daehong Comm 132 FY16 book value FRL Korea 435 11x P/E on FY16A earnings (average of peers in Korea) Inv holdings avail for sale 275 Brand Royalty 728 Treasury 135 6.2% of outstanding holdco Net debt 1,751 Holdco NAV 5,799 Holdco NAV at 30% discount 4,059 (a)

Opco 7,175 7x/8x EV/EBITDA for Dept store/hypermarket respectively Net debt 4,087 Opco NAV 3,088 (b)

Lotte Shopping Holdco + Opco 7,147 (a+b) % from current price -2% Source: Company data, Credit Suisse estimates

Figure 115: SoTP assuming Lotte Shopping + Confectionery (merged entity) forms holdco Shopping + Confectionery NAV Rationale Opco 2,440 7x/8x EV/EBITDA for Dept store/hypermarket respectively, 8x EV/EBITDA on Confec based on Consensus EBITDA Consol affiliates 3,639 Related affiliates 1,346 Inv holdings avail for sale 275 Brand Royalty 1,011 Treasury 391 Net debt 1,860 Holdco NAV 9,102.4 Holdco NAV at 30% discount 6,371.7 Opco Confec 2,016.0 Peer average of 8x EV/EBITDA on Confec based on Consensus EBITDA Shopping 7,174.9 7x/8x EV/EBITDA for Dept store/hypermarket respectively, Net debt 4,339.6 Opco NAV 4,851.3 Shopping + Confec Holdco + opco 11,223.0 Upside/downside 10% Source: Company data, Credit Suisse estimates

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Operational fundamentals are important AmorePacific and HiteJinro: Two extreme share price performances post holdco transition. Fundamentals matter most Two companies in the consumer space, AmorePacific and HiteJinro, represent two extreme cases. Both companies have changed into a holdco structure. Amore has massively outperformed post the change, while HiteJinro was the exact opposite. While a simplified structure tends to improve operational/non-operational efficiency and transparency, history tells us that the fundamentals of the core operations are key to share price performance. While AmorePacific seems to have outperformed over the past ten years, the share price has also been pressured by the poorer-than-expected execution in 2008 before the massive rerating on the back of the operational improvement in the overseas markets.

Figure 116: AmoreP+G aggregate share price Figure 117: Hite Jinro + Holdings aggregate share performance price performance

(W) (W) 400,000 120,000 350,000 100,000 Announced to 300,000 plan on Hold Co 80,000 structure 250,000 Split in May Jinro delayed the 200,000 2006 and 60,000 complet the listing schedule 150,000 Jinro listed holding structure 40,000 100,000 by 4Q06 20,000 Lotte Chilsung 50,000 acquired Doosan - - liquor unit Jan-05 Jan-08 Jan-11 Jan-14 Jan-17 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

AmoreP+G Hite Jinro+Holdings Source: Quantiwise, Credit Suisse estimates Source: Quantiwise Upside risk in case Lotte catches up with peer groups? Lotte Shopping's individual businesses have been significantly lagging its peers despite its scale in the broader retail industry in Korea. We believe that the conglomerate structure of Lotte Shopping (where all the different retail formats are under one Lotte Shopping umbrella) can improve with asset reshuffling. Because of the current conglomerate structure, each business division may have been less efficiently managed, hence partly explaining the operational underperformance compared to its peers. If, as promised by management, a holdco is formed and each entity gets separately listed, the earnings upside should be significant. Assuming the best case scenario, OP could increase by more than 70% and fair value estimate has around 60% upside, since ROE goes up to 4% from 2.5%, when we assume the leading players' margins in each channel.

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Figure 118: Earnings sensitivity in case Lotte Shopping's operational efficiency improves Current CS Assuming operational (W bn) estimates efficiency post split-up Note Revenue 31,321 31,321 Dept store 9,034 9,034 Hypermarket 8,428 8,428 CVS 3,795 3,795 Homeshopping 949 949 Himart 4,117 4,117 Super 2,330 2,330 Finance 1,892 1,892 OP 888 1,518 13% more upside if overseas operations turnaround on top of the 73% increase if margin catch up peer group Dept store 492 613 Hypermarket (63) 226 CVS 70 242 Homeshopping 64 114 Himart 169 169 Super (2) (2) Finance 173 173 (Consolidate adjustments) (16) (16) OPM (%) 2.8% 4.9% Dept store 5.4% 6.8% HDS margin applied for domestic operations Hypermarket -0.7% 2.9% E-mart margin applied for domestic operations CVS 1.8% 6.4% BGF Retail margin applied (IBES consensus) Homeshopping 6.8% 12.0% HHS margin applied Himart 4.1% 4.1% Super -0.1% -0.1% Finance 9.1% 9.1% Source: Credit Suisse estimates

Figure 119: SoTP assuming Lotte forms a holdco—base case vs blue sky (improvement in core operations) Base case Blue Sky Opco NAV 1,427 2,959 Consolidated affiliates 3,639 3,639 Related affiliates 1,346 1,346 Inv holdings avail for sale 275 275 Brand Royalty 728 728 Treasury 135 135 Net debt 1,751 1,751 Holdco NAV 5,799 7,331 Holdco NAV at 30% discount 4,059 5,132

Opco 7,175 10,492 Net debt 4,087 4,087 Opco NAV 3,088 6,406

Lotte Shopping Holdco + Opco 7,147 11,537 % from current price -2% 59% Source: Credit Suisse estimates

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Near-term consumption environment remains uncertain but in the price Macro environment remains challenging with domestic consumption likely to remain lukewarm on weak consumer sentiment, although the worst seems to be behind us. We expect 4Q to have delivered slower growth, given the high base last year (longer period of promotion with the Black Friday sale) and the weak consumer sentiment which should have weighed on discretionary expenditures. Hypermarkets should be weak, and management's strategy is taking longer to crystallise. Overseas hypermarkets could improve, but we expect this to be very gradual. The CVS business started improving recently, and given structural demand growth, this channel should continue to improve, albeit from a very low base, thanks to the stronger food and private brands categories which drove overall profitability. Ownership competition may trigger the share price

Figure 120: Family/related owned shares (%) Lotte Shopping Lotte Confectionery Lotte Chilsung Lotte Food Lotte Chemical Korea Seven Lotte Data Comm Lotteria Market cap (W bn) 7,259 2,914 1,751 839 13,453 1,007 594 508 SHIN, KH 0.93% 6.83% 1.30% - - - - - SHIN, DB 13.46% 9.07% 5.71% 1.96% 0.26% 8.95% 6.82% - SHIN, DJ 13.45% 3.96% 2.83% 1.96% - 4.10% 3.99% - Other family 0.93% 2.52% 2.66% 1.42% - 3.87% 3.51% - Lotte Samdong Welfare 0.15% ------Foundation Lotte Scholarship Foundation - 8.69% 6.28% 4.10% - - - - Lotte Culture Foundation - - - - 0.03% 0.60% 0.68% - L2 Investment Company - - - 0.04 0.00% - - - L12 Investment Company - - 15.50% Total 28.92% 31.07% 18.78% 13.78% 0.29% 17.52% 15.00% 15.50% Source: Thomson Reuters, company data

According to various media, including Bloomberg, the current Chairman of the group, DB Shin, has secured the support of the Employee Group of Lotte Holdings Co (the Japan entity). Given the complicated ownership structure (20 entities having direct/indirect ownership in Hotel Lotte), it is difficult to predict what the final ownership would look like. For this reason, Hotel Lotte's IPO could be one the most important steps as it would define who gets control of Hotel Lotte. This is because the holding structure among investment bodies is extremely complicated, especially because the ownership/leadership is split among different family members.

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Figure 121: Shareholding structure of key shareholder entities in Japan

LOTTE GREEN SERVICE KWANGYOONSA FAMILY Co., Ltd SHIN, KH: 9.3% SHIN,KH: 0.8% SHIN, KH: 10% Family: 20.8% Family: 88.8% Family: 10%

MIDORI

Japan Lotte Holdings SHIN, KH: 0.5% Family: 3.0% Lotte Strategic Investment SHIN, KH: 1.7% Family: 8.6%

Lotte Trading Name CEO Lotte Co., Ltd L2 Lotte Ice Kwangyoonsa DJ SHIN Lotte Plaza L1, L7, L8, L9, Lotte Strategic Investment DB SHIN Lotte Corp L3, L4, L5, L6 L10, L11, L12 DB SHIN & 1 Ginza Cozy Corner Co., Ltd. Lotte Holdings (unknown) Mary Chocolate Co., Ltd. L1 ~ L12 DB SHIN

5.5 6.8 46.6 46.5 22.8 34.9 9.3 19.1 72.6 57.0 5.0 Lotte Hotel Lotte Lotte Chemical 2.1 Hotel Lotte Busan Aluminium Lotte Corp

15.5

Lotteria

Source: Hotel Lotte, Korea FTC

Korea Market Strategy 76 2 February 2017

Asia Pacific/South Korea Semiconductor Devices

Samsung Electronics (005930.KS / 005930 KS) Rating OUTPERFORM Price (31-Jan-17, W) 1,973,000 COMPANY UPDATE FOCUS LIST STOCK Target price (W) 2,650,000 Upside/downside (%) 34.3

Mkt cap (W/US$ bn) 277,560 / 239.05 Methodology to unlock share value Enterprise value (W bn) 253,102 Number of shares (mn) 140.68 ■ Demerger in motion. With Samsung disclosing "retaining external advisors to Free float (%) 78.0 conduct a thorough review of the optimal corporate structure" including a split- 52-wk price range (W) 1,995,000-1,130,000 up, we believe our long-held thesis of a split-up into Holdco and Opco is now in ADTO-6M (US$ mn) 342.1 Target price is for 12 months. motion. Despite the increase in capital return, cash balance will continue to

build net of rising capex and acquisition. We think the high cash accumulation Research Analysts is a pre-requisite to fund a demerger, and is now a signal.

Keon Han 82 2 3707 3740 ■ Analysis on value creation via split-up. We detail the likely demerger [email protected] process. The Opco is created by removing all non-core assets, from which a Holdco is formed. From this, the Opco's balance sheet becomes more efficient, with ROE rising from 15% to 19%, on similar earnings power. A large cash reserve is required at the Holdco in order to buy the Opco stakes from other Samsung companies in part due to regulatory requirements. We think 33% upside represents the current hidden value that could be unlocked through the demerger. ■ Core business outlook stronger in 2017. The profitability of all of Samsung's' components business looks stronger in 2017. Particularly, 3D NAND and OLED production should increase 2x driving substantial OPM expansion. LCDs should also see a sharp turnaround as yield problems have been resolved. The new GS8 product cycle should reflate smart-phone margins. ■ Rerating under way. We maintain OUTPERFORM with TP to W2.65 mn based on split-up value. We attribute a target P/E of 10x to Opco's 2017 earnings while applying a discount of 30% to Holdco's NAV. While the split is our base case, were it not to happen, we still see a TP of W2.6 mn on mid- cycle P/B of 1.5x with improving ROE (14.4% in FY17). Our earnings growth assumption is 11% above consensus with 44% YoY earnings growth forecast for 2017. Dividends and yields have steadily been rising to support the valuation expansion. Samsung is a CS AxJ Focus List stock.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (W bn) 200,690.8 201,867.0 235,983.2 263,408.3 EBITDA (W bn) 47,954.9 52,338.1 66,515.4 70,462.3 EBIT (W bn) 26,401.7 29,243.6 42,775.7 46,213.2 Net profit (W bn) 19,052.5 22,730.6 31,928.9 34,281.5 EPS (CS adj.) (W) 131,334 161,589 233,622 250,836 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (W) n.a. 146,901 206,476 221,045 EPS growth (%) (17.3) 23.0 44.6 7.4 The price relative chart measures performance against the P/E (x) 15.0 12.2 8.4 7.9 KOREA SE KOSPI IDX which closed at 2,067.57 on Dividend yield (%) 1.0 1.4 1.8 2.1 31/01/17. On 31/01/17 the spot exchange rate was EV/EBITDA (x) 5.6 4.8 3.8 3.4 W1,161.1/US$1 P/B (x) 1.50 1.33 1.15 1.03

Performance 1M 3M 12M ROE (%) 10.4 11.4 14.4 13.8 Absolute (%) 9.5 20.1 69.6 Net debt/equity (%) Net cash Net cash Net cash Net cash

Relative (%) 7.5 15.6 62.2 Source: Company data, Thomson Reuters, Credit Suisse estimates

Korea Market Strategy 77 2 February 2017

Samsung Electronics (005930.KS / 005930 KS) Price (31 Jan 2017): W1,973,000; Rating: OUTPERFORM; Target Price: W2,650,000; Analyst: Keon Han Income Statement (W bn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 200,691 201,867 235,983 263,408 Samsung Electronics manufactures and exports a wide range of Cost of goods sold 123,490 120,279 134,051 164,665 consumer and industrial electronic equipment and products such as EBITDA 47,955 52,338 66,515 70,462 memory chips, TFT-LCD, personal computers, peripherals, EBIT 26,402 29,244 42,776 46,213 monitors, televisions, and home appliances. Net interest expense/(inc.) (1,073) (881) (970) (1,000) Recurring PBT 25,951 30,715 44,346 47,613 Blue/Grey Sky Scenario Profit after tax 19,052 22,731 31,929 34,282 Reported net profit 19,052 22,731 31,929 34,282 Net profit (Credit Suisse) 19,052 22,731 31,929 34,282 Balance Sheet (W bn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 22,637 33,564 30,921 46,776 Current receivables 25,168 26,577 31,069 34,679 Inventories 18,812 16,715 18,628 22,883 Other current assets 58,198 63,996 63,996 63,996 Current assets 124,815 140,852 144,614 168,333 Property, plant & equip. 86,477 90,709 96,293 104,244 Investments 13,609 13,609 23,209 23,209 Intangibles 5,396 5,375 5,363 5,351 Other non-current assets 11,883 11,629 12,206 12,206 Total assets 242,180 262,174 281,685 313,343 Current liabilities 50,503 47,557 49,327 53,260 Total liabilities 63,120 69,211 71,558 75,491 Shareholders' equity 190,314 208,452 234,917 262,642 Minority interests 6,257 6,262 6,262 6,262 Total liabilities & equity 242,180 262,174 281,685 313,343 Cash Flow (W bn) 12/15A 12/16E 12/17E 12/18E EBIT 26,402 29,244 42,776 46,213 Net interest 0 0 0 0 Tax paid 0 0 0 0 Working capital 8,275 4,000 (4,636) (3,932) Other cash & non-cash items 5,386 14,229 10,353 9,917 Our Blue Sky Scenario (W) 3,000,000 Operating cash flow 40,062 47,473 48,493 52,199 Our Blue Sky scenario is based on: (1) better-than-expected Capex (25,880) (24,140) (25,958) (28,975) smartphone shipments along with higher margin; (2) Stronger 3D Free cash flow to the firm 14,182 23,333 22,534 23,224 NAND and OLED demand and (3) a more proactive shareholder Investing cash flow (27,168) (24,953) (36,371) (29,788) return policy during the course of the potential demerger. Our Blue Equity raised 0 0 0 0 Sky scenario TP is based on the split-up value of 12x P/E on Opco's Dividends paid (3,130) (4,592) (5,464) (6,557) 2017 earnings and no discount attached to Holdco NAV post split. Financing cash flow (6,574) (11,592) (14,764) (6,557) Total cash flow 6,320 10,927 (2,643) 15,854 Our Grey Sky Scenario (W) 1,450,000 Adjustments 0 0 0 0 Our Grey Sky scenario is based on: (1) no Galaxy Note 7 resolution Net change in cash 6,320 10,927 (2,643) 15,854 impacting smartphone shipments/margin; (2) slower-than-expected Per share 12/15A 12/16E 12/17E 12/18E DRAM/NAND demand growth and (3) diminishing probability of a Shares (wtd avg.) (mn) 145 141 137 137 demerger. Our Grey Sky scenario TP is based on 0.9x P/B to 2017E EPS (Credit Suisse) (W) 131,334 161,589 233,622 250,836 BVPS, the recent valuation trough. DPS (W) 20,000 28,500 35,000 42,000 Operating CFPS (W) 276,157 337,477 354,818 381,938 Share price performance Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (2.7) 0.6 16.9 11.6 EBIT 5.5 10.8 46.3 8.0 EPS (17.3) 23.0 44.6 7.4 Margins (%) EBITDA 23.9 25.9 28.2 26.8 EBIT 13.2 14.5 18.1 17.5 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 15.0 12.2 8.4 7.9 P/B 1.50 1.33 1.15 1.03 Dividend yield (%) 1.0 1.4 1.8 2.1 EV/sales 1.3 1.3 1.1 0.9 EV/EBITDA 5.6 4.8 3.8 3.4 EV/EBIT 10.1 8.6 6.0 5.2 The price relative chart measures performance against the KOREA SE KOSPI ROE analysis (%) 12/15A 12/16E 12/17E 12/18E IDX which closed at 2,067.57 on 31-Jan-2017 On 31-Jan-2017 the spot exchange rate was W1,161.1/US$1 ROE 10.4 11.4 14.4 13.8 ROIC 11.7 12.8 17.3 17.1 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) (5.5) (12.8) (10.2) (15.7) Net debt/EBITDA (x) (0.21) (0.47) (0.32) (0.53)

Source: Company data, Thomson Reuters, Credit Suisse estimates

Korea Market Strategy 78 2 February 2017

Asia Pacific/South Korea Automobile Manufacturers

Hyundai Motor Company (005380.KS / 005380 KS) Rating OUTPERFORM Price (31-Jan-17, W) 139,500 COMPANY UPDATE Target price (W) 163,000 Upside/downside (%) 16.8

Mkt cap (W/US$ bn) 30,729 / 26.47 Prefer HMC under HMG restructuring angle Enterprise value (W bn) 16,287 Number of shares (mn) 220.28 ■ Beneficiary of HMG holding structure changes. With tightening corporate Free float (%) 68.8 regulations and peer pressure, we provide three restructuring scenarios for 52-wk price range (W) 159,000-129,000 ADTO-6M (US$ mn) 55.4 Hyundai Motor Group (HMG) and believe splitting three companies (HMC, Target price is for 12 months. Kia, and Mobis) into Holdco and Opco followed by the three Holdcos merger Research Analysts (scenario 1) would be the most suitable scenario for the group. Under the Michael Sohn corporate restructuring angle, we believe HMC has the biggest upside. 82 2 3707 3739 [email protected] ■ HMC's operating value is significantly undervalued. HMC's listed

subsidiaries value (W7.5 tn), auto division's net cash (W14.2 tn), and treasury shares (W1.9 tn) account for 75% (vs 54% for Kia, 48% for Mobis) of the current market cap. Considering 2017E's operating profit (excluding the auto financing division) of W5.2 tn, HMC's core operating value is most undervalued among the HMG trio (HMC, Kia, Mobis). ■ Expect an operating turnaround in 2017E. (1) Low inventory to support full plant utilisation. Low global inventory level of 2.1 months (vs normalised 2.5 months) will support full plant utilisation. (2) EM forex and auto-demand recovery tailwind still intact. EM ex-China accounted for 32% (down 2 pp YoY) of HMC's global sales in 2016. With the oil price rebound, EM forex and EM auto demand have bottomed out, which should bring positive tailwind for HMC in 2017E. (3) Rising SUV mix. HMC posted SUV sales growth of 25% YoY in 2016, reaching an SUV sales portion of 26% (up 6 pp YoY), which we expect to rise to 29% in 2017E by launching more SUVs in global plants. ■ Valuation: Our target price remains unchanged at W163,000, based on 7.5x 2017E EPS. Considering 0.6x 2017E P/B with over 3% dividend yield, we see limited downside from the current share price. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (W bn) 91,958.7 93,649.0 95,285.5 97,961.4 EBITDA (W bn) 9,151.9 8,132.4 8,955.3 9,535.8 EBIT (W bn) 6,357.9 5,193.5 5,957.2 6,280.7 Net profit (W bn) 6,417.3 5,406.4 6,149.0 6,609.1 EPS (CS adj.) (W) 22,479 18,938 21,539 23,151 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (W) n.a. 23,025 23,433 25,007 EPS growth (%) (12.7) (15.8) 13.7 7.5 P/E (x) 6.2 7.4 6.5 6.0 The price relative chart measures performance against the Dividend yield (%) 2.9 2.9 3.2 3.6 KOREA SE KOSPI IDX which closed at 2,067.57 on 31/01/17. EV/EBITDA (x) 1.6 2.0 1.7 1.5 On 31/01/17 the spot exchange rate was W1,161.1/US$1 P/B (x) 0.64 0.60 0.56 0.52 Performance 1M 3M 12M ROE (%) 10.7 8.4 8.9 8.9 Absolute (%) -4.5 0.0 5.3 Net debt/equity (%) Net cash Net cash Net cash Net cash Relative (%) -6.5 -4.5 -2.1 Source: Company data, Thomson Reuters, Credit Suisse estimates

Korea Market Strategy 79 2 February 2017

Hyundai Motor Company (005380.KS / 005380 KS) Price (31 Jan 2017): W139,500; Rating: OUTPERFORM; Target Price: W163,000; Analyst: Michael Sohn Income Statement (W bn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 91,959 93,649 95,286 97,961 Hyundai Motor Company Limited manufactures and sells passenger Cost of goods sold 73,701 75,960 76,344 78,248 cars, trucks, commercial vehicles, and auto parts. Hyundai Motor EBITDA 9,152 8,132 8,955 9,536 operates auto-repair service centres. EBIT 6,358 5,194 5,957 6,281 Net interest expense/(inc.) (232) (376) (498) (632) Blue/Grey Sky Scenario Recurring PBT 8,459 7,307 8,221 8,819 Profit after tax 6,509 5,720 6,435 6,903 Reported net profit 6,417 5,406 6,149 6,609 Net profit (Credit Suisse) 6,417 5,406 6,149 6,609 Balance Sheet (W bn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 7,331 9,339 11,122 13,100 Current receivables 4,468 5,019 5,583 6,229 Inventories 9,199 8,433 8,580 8,821 Other current assets 46,530 46,824 47,547 48,098 Current assets 67,529 69,615 72,832 76,249 Property, plant & equip. 26,662 28,829 31,105 33,294 Investments 19,509 20,014 20,575 21,338 Intangibles 4,298 4,552 4,782 5,002 Other non-current assets 47,370 48,327 49,295 50,387 Total assets 165,368 171,336 178,588 186,270 Current liabilities 41,214 41,677 42,293 42,449 Total liabilities 98,487 100,205 102,167 104,234 Shareholders' equity 62,024 66,274 71,564 77,179 Minority interests 4,857 4,857 4,857 4,857 Total liabilities & equity 165,368 171,336 178,588 186,270 Cash Flow (W bn) 12/15A 12/16E 12/17E 12/18E EBIT 6,358 5,194 5,957 6,281 Net interest 0 0 0 0 Tax paid 0 0 0 0 Working capital (13,497) (9,791) (11,126) (11,122) Our Blue Sky Scenario (W) 194,000 Other cash & non-cash items 8,388 9,684 11,615 11,899 Our blue sky target price of W194,000 is based on 9.0x FY17E EPS. Operating cash flow 1,248 5,087 6,446 7,057 Capex (8,142) (4,000) (4,120) (4,244) Our Grey Sky Scenario (W) 118,000 Free cash flow to the firm (6,893) 1,087 2,326 2,814 Our grey sky target price of W118,000 is based on 5.5x FY17E EPS. Investing cash flow (8,060) (6,015) (5,908) (6,710) Equity raised (315) (175) 0 0 Share price performance Dividends paid (1,353) (1,085) (1,145) (1,288) Financing cash flow 7,214 3,176 1,245 1,631 Total cash flow 402 2,248 1,783 1,978 Adjustments (167) (240) 0 0 Net change in cash 235 2,008 1,783 1,978 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 285 285 285 285 EPS (Credit Suisse) (W) 22,479 18,938 21,539 23,151 DPS (W) 4,000 4,000 4,500 5,000 Operating CFPS (W) 4,373 17,819 22,578 24,721 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 3.0 1.8 1.7 2.8 EBIT (15.8) (18.3) 14.7 5.4 EPS (12.7) (15.8) 13.7 7.5 The price relative chart measures performance against the KOREA SE KOSPI Margins (%) IDX which closed at 2,067.57 on 31-Jan-2017 EBITDA 10.0 8.7 9.4 9.7 On 31-Jan-2017 the spot exchange rate was W1,161.1/US$1 EBIT 6.9 5.5 6.3 6.4 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 6.2 7.4 6.5 6.0 P/B 0.64 0.60 0.56 0.52 Dividend yield (%) 2.9 2.9 3.2 3.6 EV/sales 0.2 0.2 0.2 0.1 EV/EBITDA 1.6 2.0 1.7 1.5 EV/EBIT 2.4 3.2 2.6 2.3 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 10.7 8.4 8.9 8.9 ROIC 10.3 7.5 7.9 7.8 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) (23.4) (20.2) (20.3) (20.1) Net debt/EBITDA (x) (1.71) (1.76) (1.73) (1.73)

Source: Company data, Thomson Reuters, Credit Suisse estimates

Korea Market Strategy 80 2 February 2017

Asia Pacific/South Korea Leasing & Logistics

Hyundai Glovis (086280.KS / 086280 KS) Rating NEUTRAL Price (01-Feb-17, W) 155,000 INITIATION Target price (W) 140,000 Upside/downside (%) -9.7

Mkt cap (W/US$ bn) 5,812 / 5.03 Stagnant growth with rising uncertainty Enterprise value (W bn) 6,214 Number of shares (mn) 37.50 ■ Initiating with NEUTRAL. We initiate coverage on Hyundai Glovis (Glovis) Free float (%) 48.6 with a NEUTRAL rating and W140,000 target price. Glovis is a logistics 52-wk price range (W) 207,500-149,000 ADTO-6M (US$ mn) 14.1 company which generates over 70% of sales from Hyundai Motor Group Target price is for 12 months. (HMG). ES Chung, the Vice-Chairman and the heir apparent of the group

chairman MK Chung, owns 23.3% of Glovis' stake. As the growing value of Research Analysts

Glovis benefits ES Chung the most, the stock has long been considered as Michael Sohn the beneficiary of HMG's future holding structure changes. Yet, we have a 82 2 3707 3739 [email protected] non-consensus view on the stock for the following reasons. ■ Captive HMG is no longer a growth driver. In 2006-16, Glovis' sales showed 99.8% correlation with its operating profit and 97.3% correlation with HMG's (Hyundai Motor + Kia Motors) sales volume. Considering 2016-19E HMG volume growth CAGR of 3.1% (vs 2006-16 CAGR of 7.6%), we forecast Glovis' sales CAGR at 3.6% (vs 23.3% in 2006-16) and OP CAGR of 4.4% (vs 29.3% in 2006-16). ■ Valuation derating given the ownership and regulation uncertainty. To meet the regulation, the Chung family made a block trade on Glovis in 1Q15 to lower the ownership to 29.99% from 43.39%. Not only was the stock limited down (-15%) on the next day, its valuation premium has also gradually disappeared since then. In addition, the proposed bills by the opposition party, if passed, would force the Chung family to lower their ownership of Glovis further to below 20% and disconnect HMG's circular holdings, while their lock-up period on Glovis expires in Feb-2017. Glovis' ownership premium has become an ownership uncertainty triggered by tightening regulations on conglomerates . ■ Valuation and risks. We derive our target price of W140,000 by applying target P/E of 9.6x, which is based on an average P/E of HMG stocks and Glovis' historical average P/E, to 2017E EPS. Risk to our call: faster-than- expected growth in third-party sales which can bring incremental growth. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (W bn) 14,671.2 15,340.6 15,869.5 16,566.6 EBITDA (W bn) 827.0 897.0 971.9 1,023.2 EBIT (W bn) 698.0 728.8 783.6 815.8 Net profit (W bn) 377.0 505.6 552.7 575.9 EPS (CS adj.) (W) 10,052 13,483 14,739 15,357 Change from previous EPS (%) n.a. - - - Consensus EPS (W) n.a. 15,042 15,975 17,146 EPS growth (%) (29.7) 34.1 9.3 4.2 The price relative chart measures performance against the P/E (x) 15.4 11.5 10.5 10.1 KOREA SE KOSPI IDX which closed at 2,080.48 on Dividend yield (%) 1.9 2.3 2.6 2.9 01/02/17. On 01/02/17 the spot exchange rate was EV/EBITDA (x) 7.9 7.0 6.1 5.4 W1,156.6/US$1 P/B (x) 1.88 1.67 1.49 1.34

Performance 1M 3M 12M ROE (%) 12.8 15.4 14.9 14.0 Absolute (%) -4.0 -10.1 -23.5 Net debt/equity (%) 24.5 12.3 2.5 Net Cash

Relative (%) -6.7 -15.0 -32.6 Source: Company data, Thomson Reuters, Credit Suisse estimates

Korea Market Strategy 81 2 February 2017

Hyundai Glovis (086280.KS / 086280 KS) Price (01 Feb 2017): W155,000; Rating: NEUTRAL; Target Price: W140,000; Analyst: Michael Sohn Income Statement (W bn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 14,671 15,341 15,870 16,567 Hyundai Glovis specializes in providing domestic and international Cost of goods sold 13,555 14,235 14,669 15,330 logistic services. The company's business spans from EBITDA 827 897 972 1,023 vehicle/parts/bulk logistics, general cargo services, and logistics EBIT 698 729 784 816 consulting to used automobile auction market services. Net interest expense/(inc.) 32 22 11 (1) Recurring PBT 593 704 757 789 Blue/Grey Sky Scenario Profit after tax 377 506 553 576 Reported net profit 377 506 553 576 Net profit (Credit Suisse) 377 506 553 576 Balance Sheet (W bn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 676 937 1,207 1,509 Current receivables 1,672 1,672 1,650 1,640 Inventories 772 714 770 815 Other current assets 597 818 1,032 1,276 Current assets 3,718 4,141 4,659 5,240 Property, plant & equip. 2,539 2,782 3,007 3,217 Investments 694 891 1,090 1,293 Intangibles 72 102 129 152 Other non-current assets 455 523 599 702 Total assets 7,479 8,439 9,484 10,604 Current liabilities 2,594 3,256 3,891 4,586 Total liabilities 4,382 4,949 5,573 6,267 Shareholders' equity 3,097 3,490 3,911 4,337 Minority interests 0 0 0 0 Total liabilities & equity 7,479 8,439 9,484 10,604 Cash Flow (W bn) 12/15A 12/16E 12/17E 12/18E EBIT 698 729 784 816 Net interest 0 0 0 0 Tax paid 0 0 0 0 Working capital 73 (12) 0 (78) Other cash & non-cash items 12 (48) 43 68 Our Blue Sky Scenario (W) 238,000 Operating cash flow 783 669 826 806 if non-HMG sales grow faster-than-expected, supported by M&A, Capex (396) (396) (396) (396) sales and OP could grow higher than our estimates. If Chung family Free cash flow to the firm 387 273 431 410 promises keep Glovis stake, we see potential multiple upside. Investing cash flow (848) (493) (425) (482) Equity raised 0 0 0 0 Our Grey Sky Scenario (W) 113,000 Dividends paid (75) (113) (131) (150) If new regulation requires Chung family to lower Glovis stakes to Financing cash flow (4) 103 (131) (23) avoid intra-group revenue valuation multiple could be lowered again. Total cash flow (68) 280 270 302 In addition, if HMC/Kia sales volume growth are weaker-than- Adjustments (9) (19) 0 0 expected, Glovis’ sales growth will also weaken. Net change in cash (78) 261 270 302 Per share 12/15A 12/16E 12/17E 12/18E Share price performance Shares (wtd avg.) (mn) 38 38 38 38 EPS (Credit Suisse) (W) 10,052 13,483 14,739 15,357 DPS (W) 3,000 3,500 4,000 4,500 Operating CFPS (W) 20,882 17,846 22,037 21,493 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 5.4 4.6 3.4 4.4 EBIT 8.3 4.4 7.5 4.1 EPS (29.7) 34.1 9.3 4.2 Margins (%) EBITDA 5.6 5.8 6.1 6.2 EBIT 4.8 4.8 4.9 4.9 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 15.4 11.5 10.5 10.1 P/B 1.88 1.67 1.49 1.34 The price relative chart measures performance against the KOREA SE KOSPI Dividend yield (%) 1.9 2.3 2.6 2.9 IDX which closed at 2,080.48 on 01-Feb-2017 EV/sales 0.4 0.4 0.4 0.3 On 01-Feb-2017 the spot exchange rate was W1,156.6/US$1 EV/EBITDA 7.9 7.0 6.1 5.4 EV/EBIT 9.4 8.6 7.5 6.8 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 12.8 15.4 14.9 14.0 ROIC 11.9 13.5 14.4 14.8 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 24.5 12.3 2.5 (6.4) Net debt/EBITDA (x) 0.92 0.48 0.10 (0.27)

Source: Company data, Thomson Reuters, Credit Suisse estimates

Korea Market Strategy 82 2 February 2017

Asia Pacific/South Korea Department Stores

Lotte Shopping (023530.KS / 023530 KS) Rating (from Underperform) NEUTRAL Price (01-Feb-17, W) 229,500 UPGRADE RATING Target price (W) (from 190,000) 220,000 Upside/downside (%) -4.1

Mkt cap (W/US$ bn) 7,227 / 6.25 Holdco formation could be value accretive Enterprise value (W bn) 20,039 Number of shares (mn) 31.49 despite uncertain consumption outlook Free float (%) 30.7 52-wk price range (W) 277,500-193,000 ■ We upgrade Lotte Shopping to NEUTRAL from Underperform. Our target ADTO-6M (US$ mn) 11.1 price of W220k is based on sum-of-the-parts analysis, assuming Lotte Target price is for 12 months. Shopping to form a holding company. We believe the procedure should

Research Analysts accelerate, as suggested by the company's recent disclosure,

A-Hyung Cho ■ Close to forming a Holdco? Lotte Group Chairman's announcement to 82 2 3707 3735 [email protected] improve the group transparency, and the potential regulation change could be Sohyun Lee strong incentives for Lotte Group to accelerate the procedure to form a 82 2 3707 3737 holdco. Lotte Group is different from other major Korean conglomerates in [email protected] that the key affiliate companies are heavily owned by the owner family/affiliates but complicatedly cross-held. This implies the group will have multiple options to maximise the major shareholders' ownership without affecting minority shareholders' interests significantly. ■ First steps. We expect the initial step would be to merge Lotte Shopping and Lotte Confectionery, and split the merged entity into holdco and opco. Of multiple different options, this option would minimise the cash burden by the affiliates and related parties, without harming the minority shareholders' value. ■ Holdco will result in better operating efficiency. We believe that while there is still uncertainty in the core operations amid a soft domestic consumption outlook, the formation of a holding company could result in better operational efficiency for each affiliate company, especially those which are split-up and listed separately.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (W bn) 30,156.0 30,721.9 31,320.6 32,014.6 EBITDA (W bn) 1,693.9 1,576.7 1,730.4 1,929.7 EBIT (W bn) 853.7 777.9 887.6 1,028.2 Net profit (W bn) (383.1) 319.0 380.1 452.1 EPS (CS adj.) (W) -12,164 10,131 12,069 14,356 Change from previous EPS (%) n.a. (3.3) (16.8) (10.8) Consensus EPS (W) n.a. 10,403 13,781 15,743 EPS growth (%) n.m. n.m. 19.1 18.9 The price relative chart measures performance against the P/E (x) (18.9) 22.7 19.0 16.0 KOREA SE KOSPI IDX which closed at 2,080.48 on Dividend yield (%) 0.9 0.9 0.9 0.9 01/02/17. On 01/02/17 the spot exchange rate was EV/EBITDA (x) 11.6 12.7 11.9 10.9 W1,156.6/US$1 P/B (x) 0.42 0.42 0.41 0.40

Performance 1M 3M 12M ROE (%) (2.2) 1.9 2.2 2.5 Absolute (%) 6.0 6.0 -1.1 Net debt/equity (%) 72.4 73.4 75.2 76.0

Relative (%) 3.3 1.1 -10.2 Source: Company data, Thomson Reuters, Credit Suisse estimates

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Lotte Shopping (023530.KS / 023530 KS) Price (01 Feb 2017): W229,500; Rating: (from UNDERPERFORM) NEUTRAL; Target Price: (from W190,000) W220,000; Analyst: A-Hyung Cho Income Statement (W bn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 30,156 30,722 31,321 32,015 Lotte Shopping operates department stores and discount stores in Cost of goods sold 21,245 21,582 22,034 22,582 South Korea. The Company retails clothing, household goods, foods EBITDA 1,694 1,577 1,730 1,930 and other items through several branches. It also operates movie EBIT 854 778 888 1,028 theaters. Net interest expense/(inc.) 161 172 179 186 Recurring PBT (80) 591 704 837 Blue/Grey Sky Scenario Profit after tax (346) 354 422 502 Reported net profit (383) 319 380 452 Net profit (Credit Suisse) (383) 319 380 452 Balance Sheet (W bn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 1,751 1,784 1,819 1,859 Current receivables 957 926 944 965 Inventories 3,266 3,370 3,441 3,527 Other current assets 10,024 10,212 10,411 10,641 Current assets 15,997 16,292 16,614 16,992 Property, plant & equip. 15,759 16,260 16,918 17,516 Investments 3,885 3,929 3,975 4,028 Intangibles 3,578 3,646 3,717 3,799 Other non-current assets 1,474 1,501 1,530 1,564 Total assets 40,693 41,628 42,754 43,899 Current liabilities 11,919 12,607 13,735 14,534 Total liabilities 23,606 24,244 25,008 25,710 Shareholders' equity 17,088 17,383 17,746 18,190 Minority interests 0 0 0 0 Total liabilities & equity 40,693 41,628 42,755 43,899 Cash Flow (W bn) 12/15A 12/16E 12/17E 12/18E EBIT 854 778 888 1,028 Net interest (161) (172) (179) (186) Tax paid (266) (236) (282) (335) Working capital (1,255) 98 51 61 Other cash & non-cash items 1,469 923 977 1,036 Our Blue Sky Scenario (W) (from 265,000) Operating cash flow 641 1,391 1,455 1,604 314,000 Capex (3,269) (1,300) (1,500) (1,500) Blue sky- W314,000, assuming improvement in its core domestic Free cash flow to the firm (2,628) 91 (45) 104 operations, higher margin at domestic hypermarket and department Investing cash flow (1,654) (1,300) (1,500) (1,500) store channels. Equity raised 22 0 0 0 Dividends paid (74) (59) (59) (59) Our Grey Sky Scenario (W) (from 101,000) Financing cash flow 731 (58) 80 (64) 160,000 Total cash flow (281) 33 35 40 Grey sky- W160,000, assuming a bearish case scenario in its Adjustments 0 0 0 0 domestic operations, historical low OPM for both hypermarket and Net change in cash (281) 33 35 40 department store channel. Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 31 31 31 31 Share price performance EPS (Credit Suisse) (W) -12,164 10,131 12,069 14,356 DPS (W) 2,000 2,000 2,000 2,000 Operating CFPS (W) 20,357 44,158 46,201 50,943 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 3.5 1.9 1.9 2.2 EBIT (28.2) (8.9) 14.1 15.8 EPS (172.7) 183.3 19.1 18.9 Margins (%) EBITDA 5.6 5.1 5.5 6.0 EBIT 2.8 2.5 2.8 3.2 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E (18.9) 22.7 19.0 16.0 P/B 0.42 0.42 0.41 0.40 Dividend yield (%) 0.9 0.9 0.9 0.9 The price relative chart measures performance against the KOREA SE KOSPI EV/sales 0.6 0.7 0.7 0.7 IDX which closed at 2,080.48 on 01-Feb-2017 EV/EBITDA 11.6 12.7 11.9 10.9 On 01-Feb-2017 the spot exchange rate was W1,156.6/US$1 EV/EBIT 23.0 25.7 23.2 20.5 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE (2.2) 1.9 2.2 2.5 ROIC 12.8 1.6 1.7 2.0 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 72.4 73.4 75.2 76.0 Net debt/EBITDA (x) 7.30 8.09 7.71 7.16

Source: Company data, Thomson Reuters, Credit Suisse estimates

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Appendix: Political landscape in Korea Current structure of National Assembly The structure and election process of National Assembly There are 300 law makers in Korea. Korean National Assembly members are directly elected by citizens. Among the 300 law makers, 253 represent a district, thus need to win more votes in the representing district. The remaining 47 members are based on proportional representation, based on the number of votes received by each party. The term for a National Assembly session is four years. At least 20 law makers are needed to form a "Negotiation group," which is entitled to form a consensus to accommodate a legislative process and receive funds from the state. In Korea, there are four parties that qualify as a negotiation group. Among those, Minjoo and People's Party are considered liberal while Saenuri and Bareun Party are conservative. Indeed, Bareun Party consists of members who left the Saenuri Party. The fifth party is Justice, a progressive political group. The other remaining members of National Assembly are independents, who do not belong to any party. Those parties can also be called by the terms "ruling" or "opposition" party. The party that the current president is a member of is called the ruling party. As President Park is a member of the Saenuri Party, it is considered the ruling party. The election outcome of the current National Assembly was a surprise as the liberal opposition parties gained more seats than expected, taking up the majority of the assembly for the first time since 2008. The centre to left political groups have 165 seats of the total 300.

Figure 122: Korea—the number of seats by assembly parties 2000 Conservative, Opposition Liberal, Ruling Second Liberal Others Total 133 115 17 8 273 2004 Liberal, Ruling Conservative, Opposition Others Second Liberal Total 152 121 16 10 299 2008 Conservative, Ruling Liberal, Opposition Others Adv. & Unification Total 153 81 47 18 299 2012 Conservative, Ruling Liberal, Opposition Second Liberal Others Total 152 127 13 8 300 2016 Minjoo (Liberal) Saenuri People's Bareun Justice Independent Total 121 97 38 30 6 8 300

Note: As of 23 January 2017 Source: National Election Commission, Credit Suisse research

Legislation Process First, the bill must be signed by ten members and submitted to the speaker. Then, the bill is reviewed and revised by a relevant committee. There are sixteen National Assembly committees in Korea formed by the members. After it is approved by the Assembly, the president will decide whether to veto it or not. In order for a bill to pass the Assembly, attendance by at least half the members and approval by half of the attendees are required for a standard bill. The fast track enactment, which does not need full approval by the committee, requires an approval by three-fifths of the members. Also, three-fifths can suspend filibuster, which requires one-third of the seats. Thus, while the conservative party has less power, any combination of the three parties can expedite the bill approval (or rejection) process.

Korea Market Strategy 85 2 February 2017

Figure 123: Korea—National Assembly legislation process - Bill instroduction - National Assembly - Legilative & Judiciary & submission Commettee reviews Committee examines and - Needs support by 10 or more the bill and cast votes legality and wording National Assembly members for approval

- Promulgaion - Bills tranfered to president - Plenary Session - New bill becomes effective - 15 days to review and veto - Discussions on bill within 20 days - On veto, >50% of attendance - Final approval requires and 2/3 votes required to pass bill attendance of >50% of members and votes by >50%

Source: Korea National Assembly, Credit Suisse research

Most recently announced policy objectives by the political parties We have reviewed the economic policies of the four major parties in Korea. The bills we have discussed, are mostly proposed by either Minjoo or People's Party. The policy agenda is mostly based on local media while we were able to find official objectives from their website by the two liberal parties (those are indicated as "official").

Figure 124: Korea national assembly—key economic policy agenda Minjoo ■ Strengthen criminal and civil charges for illegal activities ■ Improve ownership structure and regulation on separation of financial and industrial. ■ Derivative law suit bill (official) Saenuri ■ To revitalise the economy through competition/open markets ■ To maximise market efficiency through economic democratisation People's ■ Improve ownership structure and regulation on separation of financial and industrial. ■ Restriction on intra-group revenue transaction (official) ■ Independence of BoD (official) ■ Rights of minority shareholders and revive shareholders meeting (official) ■ National Pension Service reform (official) Bareun ■ Severe punishment for unfair trading ■ To restore entrepreneurship ■ To restrict large enterprises from entering mom and pop stores Source: Money Today, Minjoo Party, People’s Party, Credit Suisse research

The below chart shows the support rating of each party. Notably, the ruling party's rating diverged down from the Minjoo Party since October 2016.

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Figure 125: Korea national assembly—rating of political party

40

35

30

25

20

15

10

5

0 1 2 3 4 1 2 3 4 1 2 3 4 5 1 2 3 4 1 2 3 Sep Oct Nov Dec Jan

Saenuri Minjoo Bareun People's

Source: Real Meter, Credit Suisse research

Figure 126: Korea—rating and political stance by key presidential candidates Candidate Political Stance Recent rating Current position/key career experience Recent comments on chaebol reforms The Minjoo (opposition) Moon, Jae In Liberal 29.1% ■ Advisor to The Minjoo party. Ex-presidential candidate ■ Improve the corporate governance of the four ■ Chief of Staff during Roh presidency major chaebols ■ Founding member of Hangyerae Newspaper (liberal) ■ Increase the effective tax rate ■ Opposed to THAAD Lee, Jae Myung Liberal 10.1% ■ Mayor of Sungnam City (one of large metropolitan city) ■ Dismantle of the chaebol system ■ Lawyer, assistant spokesperson of previous liberal ■ For the representative of the labour union to party attend the BoD ■ Supported currency redenomination, anti-corruption ■ Introduction of the Rico Act Ahn, Hee Jung Liberal 4.7% ■ Governor of Chungchungnam-do ■ Regulate the financial industry ownership ■ Active supporter of renewable energy ■ Regulate circular ownership People's (opposition) Ahn, Cheol Soo Modest liberal 7.4% ■ Suggested referendum on THAAD ■ Control unfair trading practices in distribution industries ■ Strengthen the regulation on corporate governance ■ Resitution of unfairly earned profits Saenuri (Ruling) Yoo, Seong Min Conservative 2.2% ■ Currently congressman of Daegu, Anti-park ■ Improve corporate governance by regulating ■ Former chief of staff for President Park circular ownership, etc. ■ Supports THAAD, corporate tax hikes ■ Strengthen penalties for embezzlement by owners of the corporates Independent ■ Sohn, Hak Kyu Modest liberal 1.8% ■ Former leader of The Minjoo party ■ Ban on circular ownership ■ Former governor of Gyeongi-do from 2002-2006 Note: As of 23 January 2017. Source: Maeil Economy, Real Meter, Credit Suisse resarch

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Companies Mentioned (Price as of 01-Feb-2017) Amorepacific Corp (090430.KS, W315,500) Amorepacific Grp (002790.KS, W131,500) CJ (Korea) (001040.KS, W178,500) Celltrion (068270.KQ, W100,000) Doosan Heavy Industries & Construction (034020.KS, W28,550) E-MART Co. Ltd (139480.KS, W203,500) GS Retail (007070.KS, W52,000) HMC Inv Sec (001500.KS, W10,100) HWC (000880.KS, W35,750) HYUNDAI-ROTEM (064350.KS, W19,150) Halla Holdings (060980.KS, W61,200) Hankook Tire (161390.KS, W59,200) Hankook Tire Ww (000240.KS, W20,800) Hanwha Chemical (009830.KS, W26,600) Hitejinro (000140.KS, W11,450) Hyosung Corp (004800.KS, W134,500) Hyundai E&C (000720.KS, W44,200) Hyundai Glovis (086280.KS, W155,000, NEUTRAL, TP W140,000) Hyundai Mobis (012330.KS, W245,000) Hyundai Motor Company (005380.KS, W139,500, OUTPERFORM, TP W163,000) Hyundai Steel Co. (004020.KS, W60,800) Hyundai Wia (011210.KS, W64,500) Innocean (214320.KS, W57,600) KB Financial Group (105560.KS, W47,800) KT&G Corp (033780.KS, W99,600) Kia Motors (000270.KS, W36,500) Korea Electric Power (015760.KS, W42,450) LG Chem Ltd. (051910.KS, W272,500) LG Corp (003550.KS, W62,300) LG Display Co Ltd. (034220.KS, W31,050) LG Electronics Inc (066570.KS, W57,900) LG Household & Healthcare (051900.KS, W862,000) LOTTE Himart (071840.KS, W41,550) Lotte Chemical (011170.KS, W388,500) Lotte Chilsung (005300.KS, W1,455,000) Lotte Conf (004990.KS, W215,000) Lotte Food (002270.KS, W632,000) Lotte Non-Life (000400.KS, W2,440) Lotte Shopping (023530.KS, W229,500, NEUTRAL, TP W220,000) Mando Corp (204320.KS, W249,500) Naver Corp (035420.KS, W771,000) POSCO (005490.KS, W278,000) S-Oil Corp (010950.KS, W81,200) SK Hynix Inc. (000660.KS, W54,000) SK Innovation (096770.KS, W158,500) SK Telecom (017670.KS, W220,000) Samsung Biologic (207940.KS, W163,000) Samsung C&T Corporation (028260.KS, W127,000, NEUTRAL, TP W135,000) Samsung Electro-Mechanics (009150.KS, W56,700) Samsung Electronics (005930.KS, W1,956,000, OUTPERFORM, TP W2,650,000) Samsung Fire & Marine (000810.KS, W268,500) (010140.KS, W10,650) (032830.KS, W109,000) Samsung SDI (006400.KS, W118,000) Samsung SDS (018260.KS, W127,500) (055550.KS, W46,100)

Disclosure Appendix Analyst Certification Gil Kim, Minseok Sinn, Michael Sohn, A-Hyung Cho, Hoonsik Min and Jennifer Yu each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Korea Market Strategy 88 2 February 2017

3-Year Price and Rating History for Amorepacific Corp (090430.KS)

090430.KS Closing Price Target Price Date (W) (W) Rating 11-Mar-14 122,200 146,000 O 12-May-14 143,700 155,000 29-May-14 147,500 155,000 N 12-Aug-14 198,000 204,000 10-Nov-14 216,700 218,000 20-Apr-15 390,500 347,000 14-May-15 387,000 430,000 09-Sep-15 346,500 440,000 O 02-Feb-16 389,000 470,000

02-May-16 411,000 526,000 OUTPERFORM NEUTRAL 29-Jul-16 388,000 505,000 25-Aug-16 377,000 483,000 01-Nov-16 360,500 470,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for E-MART Co. Ltd (139480.KS)

139480.KS Closing Price Target Price Date (W) (W) Rating 24-Jul-14 229,000 250,000 N 14-May-15 252,500 R 15-May-15 252,500 250,000 N 04-Aug-15 245,000 R 25-Sep-15 226,000 250,000 N 16-Nov-15 216,000 260,000 O 10-May-16 186,000 248,000 10-Aug-16 166,500 217,000 07-Nov-16 160,500 228,000 * Asterisk signifies initiation or assumption of coverage. NEUTRAL REST RICT ED OUTPERFORM

3-Year Price and Rating History for Hankook Tire (161390.KS)

161390.KS Closing Price Target Price Date (W) (W) Rating 01-Jul-15 43,300 42,000 N * 28-Jul-15 40,350 R 25-Sep-15 40,500 42,000 N 03-Nov-15 47,150 55,000 O 19-Apr-16 53,200 55,000 N 02-Nov-16 56,500 60,000 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL REST RICT ED OUTPERFORM

Korea Market Strategy 89 2 February 2017

3-Year Price and Rating History for Hyundai E&C (000720.KS)

000720.KS Closing Price Target Price Date (W) (W) Rating 25-Apr-14 55,000 70,000 O 25-Jul-14 62,100 75,000 24-Oct-14 49,350 70,000 23-Jan-15 41,200 60,000 24-Apr-15 55,000 60,000 N 27-Jul-15 34,450 45,000 O 27-Jan-16 34,750 48,000 27-Apr-16 39,000 45,000 N 27-Jul-16 34,950 42,000 O

27-Oct-16 42,250 42,000 N OUTPERFORM NEUTRAL * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Hyundai Mobis (012330.KS)

012330.KS Closing Price Target Price Date (W) (W) Rating 28-Apr-14 301,500 374,000 O 26-Jul-14 281,500 365,000 24-Oct-14 241,000 358,000 03-Mar-15 256,000 NR * 21-Apr-15 238,000 300,000 O * 09-Jun-15 206,500 270,000 27-Jul-15 214,000 240,000 16-Oct-15 234,000 280,000 28-Jan-16 271,000 300,000 27-Apr-16 252,500 320,000 OUTPERFORM N O T RAT ED 21-Sep-16 281,500 360,000 26-Jan-17 266,000 345,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Hyundai Motor Company (005380.KS)

005380.KS Closing Price Target Price Date (W) (W) Rating 24-Apr-14 242,000 294,000 O 24-Jul-14 229,000 287,000 23-Oct-14 171,000 252,000 03-Mar-15 166,500 NR 21-Apr-15 171,000 170,000 N * 10-Jun-15 134,500 150,000 14-Jul-15 125,500 137,000 08-Sep-15 156,500 150,000 27-Jan-16 137,000 145,000

29-Feb-16 147,500 190,000 O OUTPERFORM N O T RA T ED 18-Jul-16 132,000 175,000 NEUTRAL 05-Oct-16 140,000 168,000 25-Jan-17 142,000 163,000 * Asterisk signifies initiation or assumption of coverage.

Korea Market Strategy 90 2 February 2017

3-Year Price and Rating History for Hyundai Steel Co. (004020.KS)

004020.KS Closing Price Target Price Date (W) (W) Rating 07-Feb-14 75,100 84,000 N 26-Feb-14 70,000 72,000 25-Apr-14 66,500 71,000 28-Jul-14 79,000 84,000 12-Aug-14 76,900 90,000 O 24-Jul-15 59,000 75,000 22-Oct-15 55,300 70,000 15-Jan-16 45,400 65,000 27-Apr-16 60,700 72,000

28-Oct-16 49,950 64,000 NEUTRAL OUTPERFORM 25-Jan-17 58,200 71,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Hyundai Wia (011210.KS)

011210.KS Closing Price Target Price Date (W) (W) Rating 28-Apr-14 171,500 213,000 O 26-May-14 175,500 228,000 24-Oct-14 192,500 242,000 03-Mar-15 144,500 NR 21-Apr-15 142,000 182,000 O * 07-Jul-15 96,700 140,000 26-Oct-15 134,000 150,000 28-Jan-16 109,000 133,000 27-Apr-16 100,500 104,000 N

27-Jul-16 88,900 94,000 OUTPERFORM N O T RA T ED 27-Oct-16 84,500 86,000 NEUTRAL 26-Jan-17 69,300 62,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for KB Financial Group (105560.KS)

105560.KS Closing Price Target Price Date (W) (W) Rating 10-Feb-14 36,300 46,000 O 28-Apr-14 35,050 45,000 28-Jul-14 38,600 43,000 16-Oct-14 37,900 46,000 29-May-15 40,250 55,000 07-Dec-15 34,450 R 02-Feb-16 29,350 46,000 O 20-Oct-16 41,700 50,000 02-Jan-17 42,600 55,000 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM REST RICT ED

Korea Market Strategy 91 2 February 2017

3-Year Price and Rating History for KT&G Corp (033780.KS)

033780.KS Closing Price Target Price Date (W) (W) Rating 17-Apr-14 81,100 72,000 U 17-Jul-14 94,500 88,000 22-Jan-15 78,400 88,000 N 24-Apr-15 94,900 100,000 28-Mar-16 108,500 107,000 21-Apr-16 119,000 143,000 O * Asterisk signifies initiation or assumption of coverage.

UNDERPERFORM NEUTRAL OUTPERFORM

3-Year Price and Rating History for Kia Motors (000270.KS)

000270.KS Closing Price Target Price Date (W) (W) Rating 25-Apr-14 57,300 60,000 N 22-May-14 60,100 72,000 O 18-Sep-14 54,400 88,500 24-Oct-14 54,400 98,900 26-Jan-15 46,450 70,400 03-Mar-15 46,700 NR 21-Apr-15 47,900 42,000 U * 10-Jun-15 44,250 48,000 N 08-Sep-15 50,600 61,000 O

27-Jan-16 48,600 57,000 NEUTRAL 23-Mar-16 49,800 61,000 OUTPERFORM N O T RA T ED 06-Jul-16 41,400 50,000 UNDERPERFORM 24-Nov-16 36,950 40,000 N * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Korea Electric Power (015760.KS)

015760.KS Closing Price Target Price Date (W) (W) Rating 13-May-14 40,800 40,000 N 08-Aug-14 44,350 46,000 18-Sep-14 46,400 48,000 11-Feb-15 43,500 55,000 O 05-Aug-15 51,600 64,000 04-Feb-16 53,800 68,000 11-May-16 61,200 74,000 04-Aug-16 61,300 78,000 03-Nov-16 48,700 64,000 * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

Korea Market Strategy 92 2 February 2017

3-Year Price and Rating History for LG Corp (003550.KS)

003550.KS Closing Price Target Price Date (W) (W) Rating 23-Mar-16 68,700 78,000 N * 15-Nov-16 58,100 72,000 O * Asterisk signifies initiation or assumption of coverage.

NEUTRAL OUTPERFORM

3-Year Price and Rating History for LG Display Co Ltd. (034220.KS)

034220.KS Closing Price Target Price Date (W) (W) Rating 23-Apr-14 29,000 26,000 N * 15-Oct-14 32,250 26,000 U 04-Dec-14 34,500 27,000 28-Jan-15 36,050 29,000 18-Jun-15 26,450 27,000 N 23-Jul-15 22,950 26,000 31-Aug-15 23,050 25,800 22-Oct-15 23,550 25,600 06-Jan-16 23,100 25,300 27-Jan-16 22,800 24,000 NEUTRAL UNDERPERFORM 17-May-16 24,400 23,700 27-Jul-16 30,450 25,800 24-Jan-17 31,750 27,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for LG Electronics Inc (066570.KS)

066570.KS Closing Price Target Price Date (W) (W) Rating 29-Apr-14 71,700 83,000 N * 24-Jul-14 77,000 87,000 29-Oct-14 67,800 78,000 29-Jan-15 62,600 75,000 29-Apr-15 61,200 68,000 02-Jun-15 55,400 62,000 09-Jul-15 45,750 53,500 29-Jul-15 43,800 49,000 25-Aug-15 40,850 45,500

30-Oct-15 49,100 46,200 NEUTRAL 26-Jan-16 54,800 49,000 16-Mar-16 61,900 54,000 28-Apr-16 58,200 57,000 19-May-16 54,000 50,000 25-Jan-17 54,200 52,000 * Asterisk signifies initiation or assumption of coverage.

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3-Year Price and Rating History for LG Household & Healthcare (051900.KS)

051900.KS Closing Price Target Price Date (W) (W) Rating 24-Apr-14 487,000 640,000 O 18-Nov-14 609,000 720,000 09-Mar-15 655,000 900,000 21-Apr-15 933,000 1,080,000 27-Jan-16 990,000 1,140,000 26-Apr-16 1,004,000 1,260,000 26-Jul-16 1,092,000 1,300,000 25-Aug-16 928,000 1,200,000 24-Oct-16 923,000 1,150,000

OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Lotte Shopping (023530.KS)

023530.KS Closing Price Target Price Date (W) (W) Rating 12-May-14 304,000 350,000 N 10-Nov-14 284,500 320,000 05-Feb-15 248,500 300,000 24-Feb-15 247,000 R 09-Jun-15 237,000 300,000 N 10-Aug-15 204,500 250,000 09-Nov-15 219,000 240,000 05-Feb-16 237,000 210,000 09-May-16 235,500 206,000 U

08-Aug-16 194,500 190,000 NEUTRAL REST RICT ED * Asterisk signifies initiation or assumption of coverage. UNDERPERFORM

3-Year Price and Rating History for Mando Corp (204320.KS)

204320.KS Closing Price Target Price Date (W) (W) Rating 06-Feb-14 135,000 N 24-Oct-14 182,000 221,000 O 05-Feb-15 151,000 185,000 03-Mar-15 161,500 NR 21-Apr-15 159,000 149,000 N * 16-Jun-15 128,500 134,000 27-Jul-15 118,000 122,000 16-Oct-15 139,000 180,000 O 07-Dec-15 171,000 193,000

17-Mar-16 150,500 180,000 NEUTRAL OUTPERFORM 28-Apr-16 182,000 220,000 N O T RAT ED 13-Jun-16 226,500 320,000 27-Sep-16 287,000 350,000 * Asterisk signifies initiation or assumption of coverage.

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3-Year Price and Rating History for Naver Corp (035420.KS)

035420.KS Closing Price Target Price Date (W) (W) Rating 07-Feb-14 751,000 750,000 N 20-Jun-14 787,000 850,000 31-Oct-14 754,000 1,000,000 O 04-May-15 603,000 900,000 30-Jul-15 518,000 840,000 29-Oct-15 592,000 800,000 * 28-Jan-16 631,000 910,000 * 29-Jan-16 628,000 890,000 29-Apr-16 677,000 870,000

10-Jun-16 720,000 R NEUTRAL 23-Aug-16 806,000 NR OUTPERFORM REST RICT ED 05-Sep-16 850,000 1,060,000 O N O T RA T ED 16-Jan-17 794,000 1,020,000 30-Jan-17 753,000 930,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for POSCO (005490.KS)

005490.KS Closing Price Target Price Date (W) (W) Rating 28-Mar-14 294,000 330,000 N 25-Jul-14 326,000 350,000 12-Aug-14 325,500 400,000 O 05-Feb-15 262,000 330,000 21-Apr-15 253,000 300,000 15-Jul-15 209,000 270,000 20-Oct-15 179,500 240,000 15-Jan-16 161,500 210,000 02-Mar-16 211,500 240,000 21-Apr-16 248,500 280,000 NEUTRAL OUTPERFORM 26-Oct-16 248,000 300,000 22-Nov-16 258,500 320,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for SK Hynix Inc. (000660.KS)

000660.KS Closing Price Target Price Date (W) (W) Rating 25-Apr-14 40,750 49,000 O 23-Jun-14 48,900 64,000 29-May-15 51,100 R 01-Jun-15 51,100 64,000 O 06-Jul-15 40,750 59,000 23-Jul-15 39,000 57,000 19-Aug-15 33,000 56,000 22-Oct-15 31,950 49,000 26-Jan-16 27,850 45,000 26-Apr-16 29,150 42,000 OUTPERFORM REST RICT ED 20-Sep-16 39,250 46,000 03-Oct-16 40,200 55,000 13-Jan-17 50,300 65,000 26-Jan-17 53,300 71,000 * Asterisk signifies initiation or assumption of coverage.

Korea Market Strategy 95 2 February 2017

3-Year Price and Rating History for SK Telecom (017670.KS)

017670.KS Closing Price Target Price Date (W) (W) Rating 10-Mar-14 210,000 280,000 O 25-Jun-14 240,500 300,000 21-Sep-14 292,500 350,000 29-Oct-14 269,500 330,000 29-Jan-15 284,000 345,000 07-May-15 262,500 325,000 03-Nov-15 230,000 R 22-Aug-16 221,000 NR 29-Sep-16 226,000 260,000 O * * Asterisk signifies initiation or assumption of coverage. OUTPERFORM REST RICT ED N O T RAT ED

3-Year Price and Rating History for Samsung C&T Corporation (028260.KS)

028260.KS Closing Price Target Price Date (W) (W) Rating 07-Jan-15 135,500 100,000 U * 27-May-15 190,500 140,000 12-Jun-15 182,000 R * Asterisk signifies initiation or assumption of coverage.

UNDERPERFORM REST RICT ED

3-Year Price and Rating History for Samsung Electro-Mechanics (009150.KS)

009150.KS Closing Price Target Price Date (W) (W) Rating 28-Apr-14 69,000 72,000 N 02-Jul-14 58,700 44,000 U 30-Oct-14 47,000 44,000 N 02-Dec-14 59,700 53,000 30-Jan-15 67,000 58,000 27-Apr-15 67,900 60,000 10-Jun-15 57,300 58,000 14-Oct-15 61,500 80,000 O 25-Jan-16 54,100 70,000

26-Apr-16 53,400 65,000 NEUTRAL UNDERPERFORM 25-Jul-16 55,800 68,000 OUTPERFORM 27-Oct-16 48,000 60,000 25-Jan-17 56,600 66,000 * Asterisk signifies initiation or assumption of coverage.

Korea Market Strategy 96 2 February 2017

3-Year Price and Rating History for Samsung Electronics (005930.KS)

005930.KS Closing Price Target Price Date (W) (W) Rating 06-May-14 1,346,000 1,760,000 O 07-Jul-14 1,292,000 1,740,000 08-Jul-14 1,295,000 1,720,000 28-Aug-14 1,242,000 1,700,000 07-Oct-14 1,162,000 1,680,000 03-Sep-15 1,122,000 1,630,000 29-Oct-15 1,325,000 1,785,000 11-Jan-16 1,152,000 1,690,000 28-Jan-16 1,145,000 1,550,000

01-Jun-16 1,333,000 1,702,000 OUTPERFORM 28-Jul-16 1,507,000 1,790,000 15-Dec-16 1,759,000 2,400,000 24-Jan-17 1,908,000 2,650,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Samsung Fire & Marine (000810.KS)

000810.KS Closing Price Target Price Date (W) (W) Rating 17-Feb-14 233,500 285,000 O 31-Jul-14 283,000 320,000 17-Feb-15 261,500 290,000 N 28-Oct-15 317,000 377,000 O 18-Feb-16 315,500 364,000 01-Aug-16 279,500 320,000 31-Oct-16 291,500 330,000 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

3-Year Price and Rating History for Samsung Life Insurance (032830.KS)

032830.KS Closing Price Target Price Date (W) (W) Rating 17-Feb-14 101,500 120,000 O 22-Apr-14 98,900 R 19-Jun-14 104,500 120,000 O 17-Sep-14 109,000 130,000 12-May-15 110,000 135,000 14-May-15 116,500 R 15-May-15 116,500 135,000 O 11-Aug-16 103,000 124,000 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM REST RICT ED

Korea Market Strategy 97 2 February 2017

3-Year Price and Rating History for Samsung SDI (006400.KS)

006400.KS Closing Price Target Price Date (W) (W) Rating 27-Apr-14 150,000 142,000 N 28-Apr-15 126,000 132,000 30-Jul-15 94,600 105,000 31-Aug-15 84,500 88,000 02-Nov-15 111,000 91,000 26-Jan-17 116,000 99,000 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL

3-Year Price and Rating History for Samsung SDS (018260.KS)

018260.KS Closing Price Target Price Date (W) (W) Rating 25-Nov-14 428,000 470,000 O * 27-Jan-15 242,000 270,000 N 01-May-15 256,000 220,000 U 29-Oct-15 275,000 200,000 22-Jan-16 259,500 180,000 28-Apr-16 168,000 130,000 06-Dec-16 127,500 125,000 N 23-Jan-17 132,000 120,000 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL UNDERPERFORM

3-Year Price and Rating History for Shinhan Financial Group (055550.KS)

055550.KS Closing Price Target Price Date (W) (W) Rating 12-Feb-14 43,000 53,000 O 01-Jul-14 46,300 56,000 22-Aug-14 51,800 60,000 04-Feb-15 45,700 57,000 29-May-15 41,900 60,000 22-Jan-16 37,550 52,000 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation in cludes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned

Korea Market Strategy 98 2 February 2017 where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 38% (60% banking clients) Underperform/Sell* 15% (54% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit- suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Hyundai Glovis (086280.KS) Method: We assign Hyundai Glovis a NEUTRAL rating in view of slower Hyundai Motor and Kia Motors (HMG) sales growth. We derive the target price of W140,000 by applying a target P/E of 9.6x, which is based on an average P/E of HMG stocks and Glovis' historical average P/E, to 2017E EPS. Risk: Risks to our NEUTRAL rating and TP of KRW140,000 include the following. If third-party sales grow faster than expected, there is upside risk to our cautious view on the stock. For the downside risk, government regulation could be tighter on governance structure and ownership succession. This could lead to more stake selling by the owner family. Also, we are cautious on Hyundai Motors' group sales volume going forward, and believe Glovis is going to see slower growth in the foreseeable future. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hyundai Motor Company (005380.KS) Method: Our W163,000 target price on Hyundai Motor is based on 7.5x FY17E EPS. Our OUTPERFORM rating is on the back of: (1) HMC's favourable change in strategy towards more SUVs in 2016E, (2) US inventory and incentive stabilisition with EM forex/demand recovery, and (3) YoY OP turnaround expected in 4Q16E and 2017E (after a modest +1% YoY turnaround in 2Q16) as the labour strike issue was cleared out in 3Q16. Risk: Risks to Hyundai Motor achieving our W163,000 target price and OUTPERFORM rating include the following: (1) KRW appreciation, (2) labour strikes, (3) quality defects, (4) rising M/S of imported vehicles, and (5) rising customer incentives. Korea Market Strategy 99 2 February 2017

Target Price and Rating Valuation Methodology and Risks: (12 months) for Lotte Shopping (023530.KS) Method: Our target price for Lotte Shopping of W220,000 is based on SoTP, assuming Lotte Shopping would form a holding company. We have applied 7x for department store and 8x for hypermarket business. For Lotte Card, Korea Seven, and Homeshopping, we have used the peer multiples. We have an Neutral rating, as we believe that while there is still uncertainty in the domestic consumption outlook, the formation of a holding company could result in better operational efficiency for each affiliate company, especially those which are split-up and listed separately. Risk: The risks to our W220,000 target price for Lotte Shopping include: 1) growing competition for the discount store business, 2) aggressive store expansions could cause a higher-than-expected capital expenditure burden and deteriorating returns on investment capital (ROIC) and 3) slower than expected turnaround in overseas hypermarket business may further become a drag factor. Upside risks to our Underperform rating for Lotte include: faster-than-expected recovery in the consumption trends which will lead to growth in department store or CVS. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung C&T Corporation (028260.KS)

Method: Our target price of W135,000 is based on a 30% discount- to-our target NAV estimates; referring listed Hong Kong /China conglomerates’ historical discount. While we estimate a NAV of W7.3 tn for its core operation (15x 2017E NOPAT), its investment assets are worth W31.5 tn in our estimate. In the NAV estimates, we have not allocated any separate value for the company’s sizable property assets, as our NAV estimate for its core operation already incorporates the cash flow from the property assets, which are mostly already used for the company's resorts business. Risk: Risks to our W135,000 target price include: (1) A bigger/smaller-than-expected success in execution of the growth strategy for the bio subsidiary and apparel businesses, (2) The higher operational gearing on captive customers could pose either an upside or a downside risk, and (3) share price moves of listed Samsung Group affiliates, which Samsung C&T owns stakes in. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung Electronics (005930.KS) Method: Our 12-month target price of W2,650,000 for Samsung Electronics is based on a split-up value into Opco/Holdco. We attribute a target P/E of 10x to Opco’s 2017 earnings while applying a discount of 30% to Holdco’s NAV. The dividend yield should rise for the next few years, driving P/E multiple expansion as Samsung ’s yield approaches the global tech average of about 2.5%. We assign an OUTPERFORM rating given our confidence on higher earnings and dividends led by faster 3D NAND/OLED penetration, strong DRAM profitability, smartphone recovery post the GN7 crisis and a more proactive shareholder return policy and value creation from the demerger. Risk: Risks that may impede the achievement of our 12-month target price of W2,650,000 and our OUTPERFORM rating for Samsung Electronics include: (1) the demerger process not starting in 2017, (2) heavy earnings dependence on the strength of its smartphone products and its margin sustainability given intensifying competition, (3) an earlier China entrance into 3D NAND, and (4) mis-execution in W10 tn in OLED investment for a once core additional customer.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (023530.KS, 005930.KS, 005380.KS, 028260.KS, 000270.KS, 000660.KS, 000720.KS, 000810.KS, 003550.KS, 005490.KS, 006400.KS, 009150.KS, 012330.KS, 015760.KS, 017670.KS, 018260.KS, 032830.KS, 034220.KS, 035420.KS, 051900.KS, 055550.KS, 066570.KS, 105560.KS, 139480.KS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (005930.KS, 005380.KS, 028260.KS, 000270.KS, 000810.KS, 003550.KS, 006400.KS, 009150.KS, 012330.KS, 017670.KS, 032830.KS, 034220.KS, 035420.KS, 051900.KS, 066570.KS) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (055550.KS) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (035420.KS) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (005930.KS, 005380.KS, 028260.KS, 000270.KS, 000810.KS, 003550.KS, 006400.KS, 009150.KS, 012330.KS, 017670.KS, 032830.KS, 034220.KS, 035420.KS, 051900.KS, 066570.KS) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (023530.KS, 005930.KS, 005380.KS, 028260.KS, 000270.KS, 000660.KS, 000720.KS, 000810.KS, 003550.KS, 004020.KS, 005490.KS, 006400.KS, 009150.KS, 012330.KS, 015760.KS, 017670.KS, 018260.KS, 032830.KS, 033780.KS, 034220.KS, 035420.KS, 051900.KS, 055550.KS, 066570.KS, 105560.KS, 139480.KS, 161390.KS) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (055550.KS) within the past 12 months As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (051900.KS). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (023530.KS, 005930.KS, 086280.KS, 005380.KS, 028260.KS, 000270.KS, 000660.KS, 000720.KS, 000810.KS, 003550.KS, 004020.KS, 005490.KS, 006400.KS, 009150.KS, 011210.KS,

Korea Market Strategy 100 2 February 2017

012330.KS, 015760.KS, 017670.KS, 018260.KS, 032830.KS, 033780.KS, 034220.KS, 035420.KS, 051900.KS, 055550.KS, 066570.KS, 090430.KS, 105560.KS, 139480.KS, 161390.KS). Credit Suisse has a material conflict of interest with the subject company (003550.KS) . Credit Suisse is acting as an exclusive financial advisor to LG Corp. (003550.KS) relating to the announced sale of their 51% stake in LG Siltron Inc. to SK Holdings Co., Ltd. (034730.KS). For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit- suisse.com/disclosures/view/report?i=281500&v=25gt7pu2w1mamv9zyrn8csokd . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (005380.KS, 000660.KS, 005490.KS, 032830.KS, 035420.KS, 105560.KS) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse (Hong Kong) Limited ...... Jung Il Lee Credit Suisse Securities (Europe) Limited, Seoul BranchGil Kim ; Minseok Sinn ; Michael Sohn ; A-Hyung Cho ; Hoonsik Min ; Jennifer Yu ; Keon Han ; Ray Kim To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Europe) Limited, Seoul Branch .... Gil Kim ; Minseok Sinn ; Michael Sohn ; A-Hyung Cho ; Hoonsik Min ; Jennifer Yu Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. 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Korea Market Strategy 101 2 February 2017

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